Impact of Your CIBIL Score on Your Home Loan Application: Overview
A Home Loan is a long-term commitment, which is why a borrower needs to meet certain eligibility parameters to ensure repayment without defaulting. One of these parameters is the credit or CIBIL score. CIBIL stands for the Credit Information Bureau (India) Limited, which collates all credit-related information and subsequent credit reports of borrowers.
Ranging from 300 to 900, the three-digit CIBIL score indicates your creditworthiness. It is assigned based on your past credit behaviour. A higher CIBIL score can increase your chances of home loan approval at a lower interest rate.
What is a CIBIL Score?
Credit information bureaus collect information on the basis of your credit use and this information is used to understand how you manage credit. Four credit information bureaus are authorised to collect information on Indian credit users and the most popular of these is TransUnion CIBIL.
The credit score that TransUnion CIBIL assigns to borrowers is known as the CIBIL score. A CIBIL score range between 700 and 750 is considered good. A score below 750 may decrease the chances of favourable loan terms.
Factors that Affect CIBIL Score for Home Loan
Here are some of the factors that affect your CIBIL score:
Credit History
The credit bureau considers your credit history, that is, how well you have managed to repay debts, such as loans and credit cards, in the past.
Outstanding Dues
When you have unpaid outstanding dues, it reflects in your credit report and affects your credit score negatively. Even if the amount is small, paying off is advisable.
Credit Utilisation Ratio
The credit utilisation ratio or credit utilisation rate, is defined as the ratio of your credit card expenses to the total credit card limit. Typically, a low ratio is considered ideal, indicating that the borrower can manage their credit responsibilities diligently.
Mix of Credit
A good mix of both secured and unsecured borrowings is highly desirable since too many unsecured loans in your portfolio may lead to a low credit score.
Multiple Loan Enquiries
Whenever you apply for credit, your credit score and history are assessed. Multiple Home Loan queries can give out an impression of desperation for credit, thus affecting the credit score negatively.
Also Read: What Factors Affect Your CIBIL Score?
CIBIL Score Required for a Home Loan Application
A low credit score, typically below 625, indicates irregularities in the repayment of previous credits. Ideally, a CIBIL score of 750 or above is required to increase your chances of getting approved for a Home Loan.
How Does CIBIL Score Affect Home Loan Approvals?
Here are two scenarios explaining how CIBIL score can affect your Home Loan application:
1. Housing Loan Application Rejection
A CIBIL score below 625, coupled with other factors, such as unsatisfactory income and outstanding debts, can lead to the rejection of a Home Loan application.
2. Home Loan Approvals at Unfavorable Terms
The interest rate and repayment tenure are the two main determinants of a housing loan EMI, apart from the loan amount. These factors determine the feasibility of a loan. With a credit score between 650 and 750, you can still get your Home Loan application approved. However, the terms of the loan can be unfavourable as compared to borrowers with a score of 750 and above.
Thus, your CIBIL score can impact your Home Loan application. It is advisable that you review your credit report and maintain a good credit score when applying for a housing loan.
How Good CIBIL Scores Help Secure Better Home Loan Deals
Your CIBIL score reflects your repayment history, your dependency on debt, and how you handle credit. A high CIBIL score, i.e., anything between 750 and 900 indicates timely EMI payments and better credit management.
A good CIBIL score can help you:
- Negotiate for a lower interest rate and keep your EMIs manageable. You will be able to reduce the cost of borrowing the loan by reducing the total interest payout on the loan.
- Request the lender for a longer loan tenure and repay the loan comfortably. Home Loans are big-ticket loans and therefore a flexible repayment tenure can ensure easy repayment.
- Negotiate for a higher loan sanction basis your eligibility.
Tips to Improve Your CIBIL Score
In case you do not have the required CIBIL score, you can improve it by practicing the following:
- To start with, your repayment history is one of the key factors that affect your CIBIL score. So, if you want to improve your CIBIL score, make it a point to never miss an EMI due date or credit card bill payment date.
- Never exhaust your credit limit as it can raise your credit utilisation ratio. Additionally, paying only the minimum amount due can further decrease your CIBIL score.
- Maintain a healthy mix of both secured and unsecured loans. This is important to convince lenders and credit rating agencies of your ability to handle and repay all kinds of loans.
- Never apply for too many credit cards or loans together. Too many credit card applications and loan applications lead to too many hard enquiries, which in turn, can cause a decrease in your score.
- Lastly, check your CIBIL report for errors at least once every six months. Sometimes, a borrower's CIBIL Score may drop down due to errors in their CIBIL report. Check your CIBIL score online and if you see any errors in your report, report them immediately.
A higher CIBIL score (750 or above) can improve your loan eligibility, helping you secure a lower interest rate along with better repayment terms.
A CIBIL score of 750 or above is considered ideal for securing favourable loan terms.
