Why is CIBIL Score For Home Loan Important & How To Improve Your Score?

No matter what type of loan in India you are applying for, lenders require ensuring that you hold the repayment capacity. To confirm your capacity to repay, lenders ask you to submit the different documents — right from salary slips, bank statements to income tax returns, as well as they factor in your credit score. Now, here many will ask why lenders check my credit score if I earn enough and hold adequate cash flow to repay on time. No, you have got it all wrong; they also check your income but endow high weightage to your credit score to judge your credibility. Through your credit report, they not just learn about your score; they also know about your past repayment capacity, your behaviour with credit, your credit mix, your CUR etc. All these factors help them decide whether they should lend you. A credit score is a 3-digit number that allows lenders to understand their frequency to borrow credit and their repayment behaviour in the past. A credit score is particularly crucial when you apply for a home loan. CIBIL score for home loan is thoroughly scrutinized by the lenders. Here are why lenders ask to view your CIBIL score for home loan and why it is necessary.

CIBIL score for home loan importance

Here are the listed reasons why lenders factor in your credit report for home loan approval:

· It assists lenders to know your credit behaviour

From distinct kinds of loans, you have availed in the past to those you are currently repaying, lenders, check it all to view how you manage the credit. A credit score is calculated not only from loans you have availed but from how you have utilized your credit cards. Lenders can avail an insight about how much you utilize your credit card, your CUR (credit utilization ratio) and whether you have fully repaid both your credit card dues and current and previous loan by the due date without defaulting. As such, a credit score endows your lender with a detailed outlook into how you maintain all credit types.

· It enables lenders to view if you have the repayment capacity

When you opt for a home loan, you require proving your eligibility. One of the prudent ways to assess your eligibility is through your income sources. Lenders need you to simply comply with minimum income needs. In case you are not drawing a specific monthly income, you might not be eligible for the home loan. Your credit score and income allow lenders to determine if you can repay the loan by the due date, which is why the lender factors in your CIBIL score for home loan.

· It assists lenders to view if you have any other existing loan

Applicants with existing loans who apply for home loans are looked at as risky by the lenders. Not just a home loan, not any loan application means an additional financial liability while your income stays the same. By reviewing your credit score, lenders compute if you hold the capacity to repay a high-value home loan amount. They review your loan to value ratio, also called LTV ratio, i.e., the monthly income received and the amount spent towards repaying your existing loan EMIs and credit card dues. If your LTV ratio surpasses the 60 percent margin, the lender may consider you ineligible for a home loan.

What are the ways to improve your credit score?

The credit score required for a home loan is 750 and above out of 900 credit scores. Here is how you can ameliorate your credit score if your score is below 750.

· Ensure you do not have any amount outstanding as debt: May it be any other loan or your credit card due, make sure to repay all of them before you apply for a home loan. Not holding any outstanding debts — only the regular credit card cycle (which reveals that you are taking the mini loans but even repaying them monthly) — can assist you in availing of your home loan.

· Do not use your whole credit limit: Next way to ameliorate your score for a home loan is to make sure you do not use your whole credit limit. Lenders prefer to disburse your home loan if you do not use over 30 percent of your credit limit. It simply means if your limit on a credit card is Rs 1 lakh, you must only spend Rs 30,000 on your card monthly.

· Repay your outstanding debts without defaulting: A sure shot manner to ameliorate your score is to pay your debts without defaulting. Make sure that you do not miss out on your EMI repayments and avoid repaying them late. Moreover, try not to repay just the minimum amount due for your credit card debts as it projects your incapability to repay the borrowed amount on time. Not only does it levy heavy penalties in the form of finance charges of up to 52 percent p.a., but your loan is also rejected.

· Errors in the credit report

Credit reports have credit-linked information provided by various lenders and issuers based on which credit bureaus calculate your score. Thus, any clerical error or misinformation on the lender’s part or concerned bureau can negatively affect your score. Similarly, any fraudulent loan or credit card activity done in your name also can have a negative effect on your score. Thus, make sure to fetch your report periodically to know such issues or misinformation and mention them to the bureau or lender for rectification.

· Maintain a balance between credit mix: Credit mix is the proportion of your unsecured and secured loans. Those having a higher concentration of secured loans are scored favourably by the credit bureau than the ones with an enhanced concentration of unsecured loans. Thus, those having higher unsecured loan concentration like loan against credit card, personal loan etc., can form a balanced credit mix by either replacing it with secured loans or prepaying their unsecured loans.

Bottom line:

The credit score that you require for a home loan is 750 and more. Many lenders, particularly banks, are very rigid and just sanction loans to applicants who hold this minimum credit score. Housing finance companies (HFCs), on the other hand, are usually lenient regarding credit scores and might sanction home loans to applicants with scores below 750. However, while you can avail loan, the rate of interest charged on it is usually high.