CIBIL Score for Home Loan

A CIBIL score is a three-digit-long numerical figure that is assigned to an individual by TransUnion CIBIL, one of the oldest credit bureaus in India. It is the first thing a lender sees when they receive an individual’s home loan application. There are several reasons why a lender will do that. This article will tell the reader everything they need to know about it.

Minimum CIBIL Score for a Home Loan

As such, the lenders have not explicitly specified the minimum CIBIL score an individual must have for a home loan, but the lenders do expect a CIBIL score of at least 750 while applying. A CIBIL score of 750 or above that will tell the lender that the individual can repay the loan as per the agreed-upon terms. If the CIBIL score of the individual is between 651-750, he/she can still get the home loan, but they may get it from Housing Finance Companies (HFCs) at higher interest rates and perhaps even with a shorter repayment tenor. If the individual’s CIBIL score is below the 650 mark, securing a housing loan will become all the more difficult for him/her. A CIBIL score in such a range may even cause a rejection of the housing loan application.

Why is a CIBIL Score Important for a Home Loan

A CIBIL score is an indicator of the creditworthiness of an individual. A high CIBIL score usually translates into better chances of home loan approval for the individual. If an individual has a CIBIL score of 750 or more, the lender will think of him/her as a creditworthy individual who has made timely payments towards their past credit obligations. If the CIBIL score, however, is on the lower side of the spectrum (650 or under it), the lender could even reject the individual’s home loan application, implying that an individual’s home loan approval is heavily dependent on their CIBIL score.

How An Individual’s Credit Score Impacts Their Housing Loan Application?

An individual’s CIBIL score undoubtedly affects their home loan approval in a significant manner. The CIBIL score of an individual determines his/her maximum home loan amount,  interest rate and repayment tenor length. One can take a look at the table below to see the relation between their CIBIL score and the chances of them getting a home loan.

How can one Improve Their CIBIL Score for a Home Loan

Some ways in which an individual can enhance their CIBIL score are as follows:

 

• Timely Repayment of Credit: Repaying loans and credit card bills on time signifies good financial management skills and creditworthiness. Hence, making timely repayments will gradually improve the CIBIL score of the individual. If the individual fails to do so, their CIBIL score will suffer, and so will his/her future loan approval chances as well.
• Keep a Healthy Credit Utilisation Ratio: An individual’s credit utilisation ratio is essentially the portion of the credit available to him/her that has been used up. If one wants to have a healthy CIBIL score, they must keep it anywhere between 30-40%. If the credit utilisation ratio goes beyond that, he/she must consider repaying some of the outstanding amount ahead of the due date as a high credit utilisation ratio will tell the lender that an individual is heavily dependent on credit. If the lender forms that impression, the lender may think twice before approving the loan for the individual.

• Maintain Old Credit Cards Until Their Validity Expires: If an individual has credit cards that have been active for several years, he/she may want to see them live out their validity. If the individual is making timely repayments of their dues, that will alone help him/her maintain a healthy credit score. When credit cards are closed, that account vanishes from an individual’s CIBIL report within a few months. This is something that one does not want as when a lender reviews the home loan application of an applicant, they would want to see how he/she treats their long-term debt.
• Prepay Debts Whenever Possible: Prepayment of a loan/credit card debt is the act of an individual clearing off his/her dues before the repayment tenor ends. If an individual ever finds themselves with extra funds in their account, he/she must consider prepaying any outstanding loans or credit card bills as that will automatically cause a boost in their CIBIL score.

• Space Out Credit Applications: When an individual applies for any kind of credit, the lending company inquires about their CIBIL score. These inquiries are called hard inquiries. If one applies for credit cards or loans too many times in a short time frame, his/her CIBIL score decreases. Not to mention that the individual’s CIBIL score takes a hit too everytime everytime a lender rejects his/her loan application. So, if an individual wants to take their CIBIL score to a healthy range and maintain the same, he/she must restrict the number of times they apply for credit to perhaps not more than twice a month.

• Maintain a Healthy Credit Mix: A credit mix is the ratio of unsecured to secured forms of credit availed by an individual. If there is a dominance of unsecured credit accounts in the credit mix of the individual, the lender will think that he/she is heavily-dependent on credit. As a result, the representative may even reject the loan application. Hence, one must consider taking collateral-backed loans/credit cards once in a while if he/she wants to improve their CIBIL score.

Things to Keep in Mind Before Applying for a Home Loan

Some of the things one must be mindful about before putting in that home loan application form are:

 

• Compare Home Loan Options: Different lenders charge different interest rates for home loans. Not to mention that their repayment terms will be different too. Hence, one should always look at home loan offers by different lenders and then compare them. Once that is done, it is only then that the individual must go for a home loan that he/she will be most comfortable with.
• Know the Difference Between Fixed and Floating Interest: The individual must keep in mind that home loan interest rates are determined by lending institutions in two separate ways. Either his/her home loan will attract interest as per the fixed interest rate system, or the floating interest rate system. Both such interest rate systems have their positives and negatives. Before applying for a home loan, it is recommended that the individual looks into both such interest rate systems, weigh the pros and cons and then take a call accordingly.
• Perform a CIBIL Score Check: When one applies for a home loan, the concerned lending institution will check his/her CIBIL score immediately. If the individual’s CIBIL score is above 750, then he/she has a decent chance of getting that home loan. Hence, one must always see where he/she stands in terms of their creditworthiness by taking a look at their CIBIL score ahead of applying.
• Consider Add-on Charges/Fees: On top of the standard interest, many lenders put other kinds of charges on a borrower as well. Most commonly, the individual will also need to pay the bank/HFC a processing fee, late payment penalty fees (If applicable) and prepayment/foreclosure charges if the interest on the home loan is calculated as per the fixed interest rate system. However, if the home loan interest rate is calculated on the basis of the floating interest rate system, many lenders will allow the borrower to fully prepay/foreclose the loan at no additional charge. Hence, it is recommended that the individual looks into all such costs attached before applying.
• Look for Pre-Approved Home Loan Offers: If an individual is looking to apply for a home loan, he/she might want to check with their own bank if there are any pre-approved home loan offers for them. A pre-approved home loan might just prove to be more advantageous for the borrower compared to a standard home loan. The most obvious advantage is that in the case of a pre-approved home loan, given that the bank already has the records pertaining to the financial transactions of the individual, they already have performed a handful of checks for them.
  
• Reduce the Credit Utilisation Ratio: If an individual has used more than 40% of their available credit, they must try to get it down before putting in a home loan application. One can do that by either foreclosing their loans or credit card debts before the end of the repayment tenor or by getting themselves a collateral-backed credit card.

• Avoid Applying for Credit Frequently: If a lender has already rejected the home loan application of an individual fairly recently, applying for the same right away once again is not going to do the individual any favours. In fact, frequent applications and the imminent rejections that will come after that, will only harm an individual’s credit score even further, which will diminish his/her chances of getting a housing loan even more. So, if the individual has already applied for and been denied credit once recently, he/she must wait for a few months at least before reapplying.