Buying a house is a costly proposition, which can get immensely stressful without the aid of housing finance. A home loan is a big-ticket financial commitment that can extend over decades. Thus, lending institutions undertake rigorous measures before sanctioning home loans to safeguard against bad credit. They assess every loan applicant’s eligibility based on several parameters such as their income and job profile, employer’s profile, existing loans, credit score, etc. Among these, your credit score assumes a critical role in fetching home loan approvals. It helps in establishing loan eligibility along with the probable rate of interest and other related terms.
A good CIBIL score for home loan facilitates quicker loan processing while a poor score increases your chances of loan rejection. Although there is no standard CIBIL score for housing loans, each lender may have a yardstick of an acceptable minimum score to approve or reject loan applications.
What Is a Credit Score?
Your credit score is a three-digit numeric summary of the entire credit history ranging between 300 to 900. It is based on your current and previous credit history including all secured and unsecured loans as well as other types of debt. Credit cards are also a form of unsecured credit and any delayed or missed payments are automatically reflected in your credit score.
How Is Credit Score Calculated?
There are primarily four credit bureaus in India. These are:
- TransUnion CIBIL
- CRIF Highmark
A Credit Information Company (CIC) or credit bureau provides your credit score. It collects information on customers availing different types of credit from multiple sources like banks, finance companies, credit card companies and government agencies. The CICs use this data to generate an information report and assign a credit score while analysing the credit conduct of individuals and business entities. Lending institutions refer to this record when reviewing home loan applications.
What Does Your Credit Score Mean?
Every credit bureau may have distinct scoring methods but the usual range of credit scores and what they signify are as follows:
- 300 – 500: A credit score in this range is deemed ‘poor’. It implies irresponsible credit habits and lenders are likely to reject your loan application due to bad credit history.
- 501 – 650: This is an ‘average’ range of scores and lenders may show reluctance in extending loans.
- 651 – 750: A CIBIL score in this range is marked as ‘good’. You may be able to obtain home loans at reasonable rates of interest provided you fulfil other requirements mandated by the lender.
- 751 – 900: Regarded as an ‘excellent’ range of credit scores, lending institutions normally favour applicants with such scores. One can easily secure lower home loan interest rates with attractive terms.
Importance of CIBIL Score When Applying for a Home Loan
Lenders have their own guidelines for evaluating home loan applications. Given below are the various reasons why lenders examine your credit score before granting loan approvals:
Understand the Applicant’s Credit Behaviour
Lenders scrutinise credit scores to understand an applicant’s past and present credit behaviour. Credit reports provide an overview of all the loans availed and how they have been serviced. Based on this track record, lenders can estimate your capability in managing the proposed housing loan. This is an important aspect to consider when assessing credit risk from a lender’s perspective. So if you have a good credit history and score, lenders are assured of timely loan repayments and will sanction your home loan quickly.
Appraise Repayment Potential
Every new loan adds to your financial responsibility. Lenders use credit records to see if you have other ongoing loans that may earmark you as a high-risk borrower. They can gauge whether you are capable of repaying a high-value home loan, over and above, the existing commitments. They will check your loan-to-value ratio, which is the ratio of your current liabilities against the monthly income, to ascertain adequate fund availability for taking on a house loan.
Benefits of a Good CIBIL Score for Housing Loans
A good credit score accords the following advantages when you apply for a house loan:
- Greater negotiating power for securing better loan terms
- Nominal home loan interest rates
- Sanction of higher loan amounts
- Concessional fees and charges
- Preferential home loan tenor
Tips to Improve Your CIBIL Score for Housing Loan
In case you find your credit score to be less than ideal, follow the steps mentioned below to boost your CIBIL score:
- The best way to enhance and maintain a good credit score is to make your payments by the due date. Never miss out on instalments or pay them late; this will lower your credit score.
- Pay off all outstanding dues and loans before you apply for further credit. Your CIBIL score rises when you prepay loans.
- Monitor your credit report occasionally and check for inconsistencies that may decrease your credit score. In case of errors, report and rectify them at the earliest.
- Availing multiple short-term loans may negatively impact the CIBIL score.
- Avoid overshooting the credit limit; restrict your credit utilisation ratio to 30%.
- Do not apply with several other lenders when seeking credit or loans. It will bring down your credit score.
- Pay off credit card bills in full each month. Try not to pay just the minimum amount due. This way the interest adds up every month increasing your debt burden.
Applying for a Home Loan with a Low Credit Score
Generally, banks are very particular about sanctioning housing loans to applicants with excellent credit scores. But housing finance companies (HFCs) may show leniency and accept loan applications from individuals with modest credit scores between 600 – 750. Nonetheless, it must be noted that even though you may be able to secure home loan approvals from HFCs, the interest rates might be much higher. Besides, you could be offered stricter loan terms, which may further raise your financial obligations. Before you apply for a house loan, access a Home Loan EMI Calculator to calculate home loan EMIs and weigh loan viability.
In addition to verifying CIBIL scores for a housing loan to ensure efficient credit habits, lenders will also appraise your income to determine your loan repayment potential. They normally have a certain income threshold, below which individuals may not qualify for a house loan. Therefore, use a Home Loan Eligibility Calculator to see if you fulfil the requisite conditions for availing a home loan before you proceed with the loan application.