Importance of a Good Credit Score in the Home Loan Process

Lenders take a risk when they grant a loan to a borrower and therefore, to minimize the chances of loan default, they set up eligibility requirements. Borrowers who do not meet eligibility either get rejected or find themselves repaying the loan at high-interest rates. Lenders’ eligibility requirements vary around factors, such as age, income, existing debt, LTV ratio, etc. One of the key factors that influence Home Loan eligibility is the credit score.

The credit score or CIBIL score is a three-digit number between 300 and 900, assigned to a borrower based on their credit history, that represents a borrower’s creditworthiness and ability to repay the loan on time. The higher a borrower’s credit score or the closer it is to 900, the better their chances of availing of a Home Loan or a loan of any kind. Credit rating agencies assign credit scores to borrowers based on the credit report, which is an electronic representation of a borrower’s credit history and the ideal credit score for Home Loans is anything above 750.

In this article, we look at the importance of credit scores and how and why a good CIBIL score range can help borrowers avail of a loan on beneficial terms and conditions.

Importance of Credit Scores in the Home Loan Process

These days, most people rely on Home Loans to fund a property purchase. Home Loans give borrowers the required funds to invest in real estate. Further, when it comes to Home Loans, the borrowers get the added benefit of a long repayment tenor, which makes repayment easy, giving borrowers ample time to repay the loan without feeling financially burdened. Further, Home Loans are low-interest rate loans and therefore, they are affordable too. However, borrowers get low-interest rates and long repayment tenors on Home Loans only when their CIBIL score falls within the good CIBIL score range, i.e. anything between 750 and 900. Let us understand why a good CIBIL score is important when availing a Home Loan.

Also Read: Importance of CIBIL Score & Tips To Improve It

It Helps a Lender Understand Your Attitude Towards Credit

What is the maximum CIBIL score one can have? The answer is 900. However, lenders consider anything between 750 and 900 excellent. Borrowers who have an excellent repayment history, have never missed any EMI payments, maintain a low credit utilization ratio and borrow credit only when necessary have such a CIBIL score. In other words, a credit score range of between 750 and 900 is a sign of a borrower who can be trusted with timely repayment of loan money. Such a borrower has a serious attitude towards credit and it is highly unlikely that they will default on loan repayment.

It Helps Lenders Assess the Risk Involved for Them

Borrowers whose credit score ranges between 750 and 900 have never defaulted on loan repayment and it is highly unlikely that they will do so in the future too. Borrowers whose credit score ranges between 700 and 750 cannot completely rely on timely repayment of loan money and therefore, there is some risk involved for the lender in lending them loan money. Borrowers whose credit score is below 700 pose much risk for the lender. By looking at a borrower’s credit score, lenders get an idea of the risk involved for them in lending money to the borrower and based on the kind of risk involved, lenders decide the terms and conditions of the loan.

A Borrower’s Credit Score Also Helps Lenders Assess their Current Debt Situation and Other Important Things

Credit information agencies decide a borrower’s credit score based on several factors, such as their repayment history, credit utilization ratio, credit mix, current debt, etc. While factors, such as repayment history and credit utilization ratio, help lenders assess borrowers’ attitudes towards credit, factors, such as current debt situation allow lenders to judge a borrower’s repayment capacity. A borrower’s debt situation and repayment capacity help lenders design the right loan plan for them.

The best CIBIL score for Home Loans is anything above 750. Here’s how such a CIBIL score can help borrowers during the Home Loan process. 

Benefits of Credit Scores in the Home Loan Process

If you have a good credit score for Home Loans, here’s how you will benefit.

• The biggest benefit of a good credit score is that you will get approved for a loan quickly.
• If you have a good CIBIL score, i.e. anything between 750 and 900, your lender will offer you the lowest Home Loan interest rate they have to give. A low-interest rate loan will help you save money in the long run by way of reduced interest payout. Further, it will help you keep your EMIs affordable and easy to repay.
• Borrowers who have a good CIBIL score for Home Loans also have high negotiating power. In other words, such borrowers can negotiate with different lenders and ask them for better terms and conditions on their loans.
• A good CIBIL score for a Home Loan also makes borrowers eligible for a higher loan sanction. This is helpful as a bigger loan value helps borrowers afford their dream homes.
• As mentioned before, a good CIBIL score gives borrowers high negotiating power. All lenders want borrowers who have high repayment capacity and creditworthiness. Thus, when such borrowers approach a lender, lenders try to entice them with the best loan deals. Such borrowers not only get offered a low rate of interest and high loan sanction but also get offered a long repayment tenor to make repayment easier. If your credit score lies within the good CIBIL score range and your lender is not offering you these conditions, you can negotiate with them and ask for better loan terms and conditions.
• Lastly, if you have a good CIBIL score, you may be pre-approved for loans from lenders. When a borrower is pre-approved for a loan, the entire process of availing of the loan becomes quite straightforward.

Final Words

If you are planning to apply for a Home Loan, check your CIBIL score at least six months in advance. This will give you ample time to take corrective measures in case your CIBIL score does not meet your lender’s eligibility requirements. The best CIBIL score for Home Loans is 750 and such a CIBIL score will help you land the best Home Loan deals. However, if you do not have such a CIBIL score, do not worry. By practising strong financial discipline, you will easily be able to bring your credit score into the good CIBIL score range. So, be patient and keep working on building your credit score.

Also Read: Tips to Maintain Your Business CIBIL Score Above 700