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What is CIBIL Score - How Does it Impact Your Home Loan Application

Updated: Feb 17, 2022
CIBIL score for Home Loan - How Does it Impact Your Loan Application

Planning to take a home loan to buy your dream home? This is an excellent decision, especially since a home loan has several advantages, the most important being that it gives you the ability to get your own home. However, before applying for a home loan, it is highly recommended that one should check their credit score as it plays a very big role in determining the chances of approval of the home loan application.

This is because credit score is one such metric that lets lenders measure the creditworthiness of the borrower and risk of default instantly. Therefore, having a good credit score is crucial to boosting your home loan eligibility and getting the loan at an attractive interest rate.

In India, there are 6 major credit bureaus, but the most commonly used credit score is the one provided by TransUnion CIBIL. Like all other credit bureaus, it collects information from financial institutions and analyzes the credit related transactions (including credit card and loan applications) for every PAN card holder in the country. . Based on the information collected, CIBIL calculates the credit score for each individual. Let’s understand it in detail.

CIBIL Score Definition

CIBIL Score is a three-digit number that represents your credit score. The CIBIL credit score ranges between 300-900, with a score close to 300 indicating extremely poor creditworthiness of the borrower. And, a score above 700 is considered to be a good credit score and preferred by lenders. A score of “NH” or “-1” means that the person has never had any credit related transactions.

However, you should note, the impact on the credit score will not be instantaneous. It will improve gradually over the next few months. Therefore, whatever steps you are taking should be aimed at making a long-lasting impact on the CIBIL score.

To calculate the credit score, CIBIL evaluates the past credit repayment history, number of loan accounts, loan tenure of the last seven years.

The following are the credit score ranges that showcases good or bad CIBIL score:

  • Below 600: Very Bad
  • 600-649: Bad
  • 650-699: Satisfactorily
  • 700-749: Good
  • 750 and above: Very Good
  • “NH” or “-1” : No credit history

Lenders prefer borrowers falling under the last two categories (Good and Very Good), as the chances of default are least. To get a home loan from Grihashakti, you need to have a CIBIL score of at least 700.

Must Read : How Your Credit Score Can Impact Your Home Loan ?

CIBIL Score Required for Home Loan

Home loans are big-ticket size loans and the repayment tenure usually ranges between 10-20 years. These factors increase the risk factors for lenders as it gets extremely difficult to judge whether the borrower will make timely repayments or not.

At Grihashakti, the minimum cut-off for the CIBIL score required for a home loan is 700. This cut-off may be different for other lenders.

If you have a credit score below 700, but higher than 600, there are still chances of your home loan application getting approved if you provide a higher down payment and have a co-applicant who has an excellent credit score and a stable income. However, this entirely depends on the lender’s policy and it may be better to check with the lender before applying.

In case, your CIBIL Score is below 600, you should consider taking steps to improve your credit score before applying for a home loan.

Tips to Improve CIBIL Score

Improving your CIBIL score is not an overnight process. It takes around 4 to 12 months of consistent effort to improve the CIBIL score. The following are a few tips to improve CIBIL score:

Make timely repayments and be disciplined with credit: Repayments of outstanding debt have a significant impact on your credit score. Missing one or two EMIs can significantly lower your credit score and impact creditworthiness. Always pay your loan EMIs as well as credit card dues in full and on time.In case of any defaults or missed EMIs, settle these with the lender at the earliest to avoid constant loan rejections.

Reduce credit utilization ratio: If you use a credit card, reduce the spending to up to 30% of the total card limit. A higher credit utilization ratio indicates you are highly dependent on credit to meet your short term requirement and that is considered negative.

You can also consider increasing your credit card limit to reduce the credit utilization ratio and continue enjoying the credit card benefits.

Opt for longer loan tenure: When borrowing a loan, always take a longer repayment tenure. This will help you to reduce the risk of default and a low EMI amount will ensure that you don’t face any problems while repaying.

Avoid applying for a loan to multiple lenders within a short period: Whenever you apply for a loan, the lender initiates a hard inquiry to check your credit profile from the CIBIL database. Multiple hard inquiries within a short duration indicate you may be in financial trouble and are looking for funds desperately. Therefore, you should maintain at least a 6 months gap between two loan applications.

Rectify errors in the credit report: There may be mistakes on part of CIBIL or your lender in reporting or updating records. This also impacts your credit score. Therefore, you should study your credit report at regular intervals to ensure there are no errors. In case of any, you should report to your lender and CIBIL for dispute resolution.

Conclusion

You must have understood how the CIBIL score influences your home loan, and what steps you need to take to ensure a higher approval of the home loan application by the lender.

To further improve the chances of approval of a home loan application, your total EMI to income ratio (debt to income ratio) should not cross the 30% threshold. Through this way, you can ensure there is enough disposable income at hand to meet the necessary expenses and don’t add to any financial stress. The lender may also consider you to be a good candidate and offer you better terms on the loan.

Use the home loan eligibility calculator to know your home loan eligibility as well as for EMI planning.

Must Read : Steps to get home loan with Low CIBIL Score.

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