Importance of a Good CIBIL Score When Applying for a Home Loan

A credit score – also known as a CIBIL score – is a three-figure number that helps a lender understand the repayment capability of a borrower and know whether they have repaid their previous loans on time or not.

The minimum credit score for a loan may vary depending on the lender and the type of loan. For example, a lender may ask for a higher credit score for a personal loan as it is an unsecured loan. However, the required credit score criteria for a home loan can be a bit relaxed.

Importance of credit score for a home loan

• It helps a lender understand the borrower’s credit history.
  Since a home loan involves a large sum of money, a lender conducts several checks before sanctioning it. Apart from verifying property details, it evaluates the borrower’s credit history by looking at their credit score. This helps them understand how frequently a borrower has taken loans and whether they have repaid them on time or not. By checking a borrower’s credit score, a lender also gets an insight into how responsibly a borrower has handled their credit. If a borrower has maintained a low credit utilization ratio and has repaid all their debts on time, their chances of getting a home loan approval increase
• It helps a borrower prove their eligibility to the lender.
  Each lender has its own eligibility criteria for a home loan. These may include certain requirements in terms of age, location, monthly income, employment status, and credit score. The required CIBIL score for a home loan may range anywhere between 700 to 900. Borrowers with good credit scores may find it a lot easier to get home loans, and that too, at the lowest interest rates. It is because a healthy credit score reflects that the financial condition of the borrower is sound, and they can repay their home loan EMIs without defaulting.
• It helps a lender calculate a borrower’s LTV ratio.
  A lender may want to know the existing financial obligations of a borrower before approving their home loan application. If a borrower is already struggling with too many EMIs and other responsibilities, there is a high chance that they will default on their home loan repayment. The CIBIL score of a borrower reflects their outstanding debts. After knowing the current financial responsibilities of a borrower, a lender calculates their loan-to-value (LTV) ratio to evaluate if they will be able to pay their home loan EMIs or not. Generally, an LTV ratio of 50% or less is considered satisfactory by lenders for approving home loan applications.

How to improve one’s credit score for a home loan?

As one can see, a good credit score is necessary to fulfil the eligibility criteria for a home loan. But what if a homebuyer must have the minimum credit score for a loan? Here are the steps that they can take to improve their CIBIL score:

• One should apply for a loan only when it is necessary. Applying for too many loans has a negative impact on the applicant’s credit score.
• One should check their eligibility before applying for a loan. If a lender rejects a borrower’s loan application, it causes a decline in their credit score
• One should ensure timely repayment of loan EMIs and credit card bills. Any delay or default in loan repayment can hamper one’s credit score badly.
• One should use their credit card wisely. By keeping their credit utilization ratio below 30%, one can provide a significant boost to their credit score.
• One should keep checking their CIBIL score at frequent intervals. In case they notice a discrepancy with their credit score, they must inform the credit rating agency immediately

Conclusion

Usually, the best credit score for a loan is 700 or above. However, some lenders provide loans for low credit score borrowers, but they may charge them a higher interest rate. That is why one must ensure a good CIBIL score before applying for a fresh home loan. If someone’s credit score is below the satisfactory level, they should take immediate steps to improve it.

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