The Role of CIBIL Score in Determining your Home Loan Disbursement Amount

Lenders minimize chances of loan default by lending money only to those borrowers who have high creditworthiness and repayment capacity. To judge a borrower's ability to repay loan money on time, lenders check various things about an applicant, such as their income, age, existing debt, CIBIL score, etc. The CIBIL score plays a determining role in deciding whether or not an applicant's loan application will get approved as well as other crucial things, such as the loan amount that can be sanctioned, the rate of interest to be offered to a borrower and the loan tenor to be given to them. So, what is a CIBIL score or credit score? 

What is Credit Score? 

Millions of people avail of credit or loans to take care of life's various needs and responsibilities. Home Loans, car loans, education loans, personal loans, loans against property have become quite common and most people avail of these loans at some point in their life. The Reserve Bank of India has authorized four companies to collect information on how borrowers use, handle and repay credit. These are Experian, Equifax, CRIF Highmark and TransUnion CIBIL. These companies study a borrower's attitude towards credit and their ability to repay loan on time based on the information provided to them by lenders and financial institutions. Based on their results, they assign a three-digit number between 300 and 900 to borrowers. This number is known as the credit score. The credit score assigned to borrowers by TransUnion CIBIL is known as the CIBIL score. A high credit score, i.e., anything between 750 and 900 is considered an excellent credit score for Home Loan. Lenders consider anything between 700 and 750, fair, but anything underneath 700 raises red flags immediately.  

Let us now look at how CIBIL credit score affects Home Loan approval as well as the Home Loan disbursal amount.  

What is the Minimum CIBIL Score Required for a Home Loan? 

Lenders consider anything between 750 and 900 a high CIBIL score. Such a CIBIL score is the mark of a borrower who borrows money cautiously, pays loan EMIs and credit card bills on time, maintains a healthy credit mix of both secured and unsecured loans and in general, has a very good attitude towards credit. A low CIBIL score, i.e., anything below 700 depicts a borrower who has defaulted on loan payments in the past and therefore, cannot be completely trusted with timely repayment of loan money.   

 Also Read: Know About Home Loan Disbursement and Sanctioning Process 

How Does a Borrower's Credit Score Impact their Home Loan Disbursal Amount?  

Borrowers or loan applicants with a high CIBIL score pose no risk of loan default to a borrower and therefore, lenders readily sanction loans to such borrowers. On the other hand, borrowers who have a low CIBIL score are seen as risky borrowers by lenders and therefore, lenders either reject loan and credit card applications made by such individuals or sanction a loan on very high-interest rates to make up for the risk involved. The minimum CIBIL score for a Home Loan is 750. If your CIBIL score is below 750, here's how it will affect your loan disbursement amount and other things.  

If your CIBIL score is below 750, your lender will see you as a high-risk borrower, someone who can default on loan repayment. Therefore, to compensate for the risk involved in getting you on-board as a client, the lender will do the following things:  

1. They will charge you a high rate of interest. Borrowers should try and avail of loans on the lowest interest rate possible since a high Home Loan interest rate makes EMIs expensive and also increase the overall cost of borrowing the loan.  
2. They will sanction a lower Home Loan disbursement amount. In general, most lenders sanction anywhere up to 75% to 90% of the property's actual market value as a loan. The loan-to-value ratio is the ratio of the loan amount sanctioned to the total value of the property, expressed in percentage. In the case of Home Loans, the loan-to-value ratio can go up to 85%. However, when a borrower's CIBIL score is low, lenders reduce the loan disbursement amount to cover up for the risk.  
3. If you do not have the right credit score for a Home Loan, some lenders may ask you to repay the loan over a short repayment tenor. This is because they want to try and collect the money back as quickly as possible. A short tenor makes loan repayment difficult. 

How to Improve CIBIL Score? 

If you do not have the required CIBIL score for a Home Loan, do not worry. Here are a few things you can do to improve your CIBIL credit score and increase your chances of getting approved for a loan and getting a higher loan sanction as well.  

1. Make a habit of clearing loan payments and EMIs on time. A disciplined repayment history helps build a strong credit profile and an excellent credit score.  
2. Never exhaust the limit on your credit cards. Further, do not make the mistake of paying only the minimum amount due on your credit card each month. Doing these things reduces your credit utilization ratio, which in turn, reduces their credit rating or CIBIL credit score.  
3. Apply for credit or a loan only when you need it. Do not apply for a loan or a credit card simply because there is a beneficial offer going on. Applying for credit way too often portrays a borrower to be credit hungry and reduces their credit rating.  
4. Maintain a healthy mix of both secured and unsecured loans. This will convince lenders of your ability to handle all types of loans and increase your CIBIL credit score.  
5. Lastly, check your credit report from time to time. This way, if your CIBIL score is low or if there are errors in your report, you can take corrective measures immediately.  

Conclusion 

The importance of CIBIL score cannot be undermined in the Home Loan process. If your CIBIL score is low, do not worry. CIBIL Score can be improved, the tips shared above will certainly prove helpful in this regard.  

Also Read: Importance of CIBIL Score and Tips to Improve It