Home Loans are a premium, long-term commitment, which is why lenders set certain eligibility parameters for the borrowers to meet, thus ensuring there are no defaults in repayment. One such parameter, among others, 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 3-digit CIBIL score indicates the borrower’s creditworthiness and is assigned based on an individual’s previous credit behavior. To know how credit score affects Home Loans, read on.
Factors That Affect CIBIL Score for Home Loan
Here are some of the factors that affect your CIBIL score, considered for Home Loan sanctions.
Credit History
The credit bureau considers your credit history i.e. 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 adversely affects your credit score. Even if the amount is small, paying off is advisable.
Credit Utilization Ratio
One of the most crucial CIBIL score Home Loan factors, Credit Utilization Ratio or Credit Utilization Rate, is defined as the ratio of your credit card expenses to the total credit card limit. Typically, a ratio of 30% or less is considered ideal.
Mix of Credit
A good mix of both secured and unsecured borrowings is highly desirable since too many unsecured loans in the borrower’s portfolio may lead you to you having a low credit score.
Multiple Loan Enquiries
Whenever you apply for credit, your lender pulls out your credit score and history for review. When customers make multiple Home Loan queries with banks and lenders, sometimes, it 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
Lenders lack confidence in borrowers having poor credit scores. When you have a low credit score, typically below 650, the lender assumes a high risk in lending funds. This is all the truer for Home Loans since the amount and the repayment tenor for housing loans are usually higher. Therefore, a CIBIL score of 750 or above is required for a quick Home Loan approval.
How Does CIBIL Score Affect Home Loan Approvals
Here are three scenarios explaining how CIBIL score can affect your Home Loan application –
1. Housing Loan Application Rejection
A low CIBIL score, say 500, coupled with other factors, like unsatisfactory income, outstanding debts etc., often leads to the complete rejection of a Home Loan application.
2. Home Loan Approvals at a Higher Interest Rate
With a credit score between 650-750, you can still get your Home Loan application approved but the rate of interest applied would be higher than that offered to borrowers with a score of 750 and above.
3. Home Loan Approvals at Unfavorable Terms
The interest rate and repayment tenor are the two main determinants of a housing loan EMI. Currently, Home Loan tenors in India extend up to 30 years, based on the applicant’s profile. However, in the case of an applicant with a lower CIBIL score, the lender may not want to risk it – and thus, instead of approving a long-term loan, he may sanction a housing loan for a short repayment tenor. Alternatively, the lender may even reduce the Loan-to-Value Ratio and demand that the borrower opts for a higher down payment. In either case, this could lead to a higher financial burden on the borrower.
Thus, your CIBIL score, bad or good, has a far-fetched impact on a home plan. Hence, it is highly recommended to review your credit reports and ensure having a good credit score when applying for a housing loan.
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