Your CIBIL Score determines your loan eligibility. CIBIL (Credit Information Bureau India Ltd.), India’s first credit rating agency, evaluates your creditworthiness based on your credit history, repayment habit of loan/credit card dues, frequency of loan applications, number of ongoing loans, and other factors.
CIBIL Scores are assigned on a scale of 300 to 900, with 900 representing the highest and 300 representing the lowest. A 750 CIBIL Score is generally required for a borrower to be easily eligible for a loan.
CIBIL Score for Home Loan
If you want to apply for a loan and avoid being turned down, you should understand the significance of a CIBIL score in the loan approval process.
When you apply for a loan, the first thing a lender looks at is your credit score. If you have a low credit score, the lender is likely to reject your loan application. However, if you have a good credit score (above 750), the lender will investigate the application further to determine the borrower’s creditworthiness before making a final lending decision. Based on your repayment history, your credit score provides lenders with an instant assessment of your likelihood of default.
What are the uses of CIBIL Score for home loans?
Banks or financial institutions typically provide home loans, and as lenders, they must ensure that all relevant risks are minimized. This is where your CIBIL score comes into play.
Every month, TransUnion CIBIL Limited, a credit information company, generates reports on each individual and commercial organization’s credit history. The CIBIL score is an essential component of this report.
By default, all banks and financial institutions are members of CIBIL and provide and receive information from them. When a person applies for a home loan, the lending financial institution looks at his or her CIBIL reports, particularly the CIBIL scores. They form a better judgment of one’s history as a lender as a result of this and then decide whether the home loan application is accepted or rejected.
How is Credit score calculated?
Each credit bureau in India calculates credit scores using its own proprietary algorithms. However, the fundamental components of a credit score remain largely unchanged. The credit score is calculated using factors such as:
- Your credit history.
- The credit balance or total amount owed to various lenders.
- The amount of time you have used credit for.
- Any new credit you have applied for or obtained.
- The credit composition (credit composition in terms of different types of loans).
How do lenders make use of CIBIL scores?
Previously, lenders had to make a partly subjective internal assessment and conduct background checks before sanctioning a loan. However, with the assistance of a credit score and a credit report, it is now very simple for the lender to obtain accurate, data-based credit information on the applicant.
CIBIL maintains a database of customer credit-related activity. This information is used to calculate their credit score.
- If your credit score is low (less than 700), lenders may view you as a high-risk customer with a history of payment defaults and may be unwilling to approve your loan application.
- If you have a high score, lenders will see you as a low-risk customer with a low likelihood of default and will be willing to lend to you on favorable terms.
While there is no set minimum CIBIL score required to apply for a card, it is recommended that you have a score of at least 700 before applying for a home loan.
How to improve your credit score for a home loan?
While scores of 700 and above are considered good enough for loan acceptance, there is also a range of CIBIL scores that are unacceptable for home loans. A score of 350 to 650 may not be ideal, but it may be adequate in some cases. A CIBIL score of less than 350, on the other hand, can be a major source of concern, not only for home loan acceptance but also as an overall representation of your repayment ability.
However, lower CIBIL scores are not set in stone. You can take proactive steps to avoid these numbers or even raise them over time to help you meet the CIBIL score required for your home loan application.
- Before applying for a home loan or any other type of loan, make sure to check your CIBIL score. By ensuring that your CIBIL score for a housing loan is not lower than the expected standard, you reduce the likelihood of your loan application being rejected. This is significant because loan rejection can significantly lower one’s CIBIL scores.
- If you are turned down by a lender, work on improving your CIBIL score for a home loan before applying to another lender. Too many loan requests and rejections can have a negative impact on your credit history and credit score.
- If you have any unsecured loans, such as a personal loan or credit cards, make it a priority to manage them. Try to close them with a high credit limit if at all possible. This is because lenders can look at your total outstanding debt balance and assess it based on your Debt to Income (DTI) ratio. Higher debt leads to a higher DTI ratio, which reflects poorly on your ability to repay.
A good CIBIL score is critical when applying for a home loan, especially if you want to get it at a lower interest rate. Banks may either reject an application or grant home loans at higher interest rates to people with bad credit. As a result, always maintain a good CIBIL score in order to easily obtain home loans and make your dream home a reality.
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