Credit Score and Home Loan

All that you should know about credit score

Buying your dream home is a dream come true and home loans have made it very easy for people to buy a home but, as easy it appears, home loan approval involves a series of steps and eligibility criteria which you need to fulfill to get the loan from the bank.

Banks and HFCs take into account a number of factors that define your eligibility for loan approval. One of the key parameters is CIBIL score or credit rating. Credit Score defines your credibility and how good you are in repaying your credit bills and EMIs. In other words, it describes how good is your financial health which in return increases the probability of your loan approval.

Detailed understanding of credit score –

CIBIL stands for Credit Information Bureau India Limited. This organization came into existence in August 2000 and looks after the credit ratings. It collects and maintains credit records of individuals as well as commercial entities. The credit records the borrowing payment relation. This includes all payments and borrowing related to loan or credit card.

On the basis of information collected, CIBIL assigns your credit score or CIBIL rating which banks reviews before approving the home loan. It’s a credit score of three digit numeric summary of your credit history. The credit score varies between 300-900.

Your credit report is available with CIBIL and can be availed by paying a nominal fee.

The credit report includes the following:

  • The history of the credit availed by you
  • Record of all the loans repaid by you and your credit card bill repayments
  • Late payments or penalties on past credit
  • Latest information about loan application and credit application by you
How Credit Score affects home loan eligibility?

Your credit score plays a key role in home loan approval. Once you submit the application for a home loan, bank checks your credit score and reviews your credit history.

Thus, if you have a good credit score, your home loan application will be processed faster, on the other hand, a poor credit history and score might get your application rejected.  Well, there is no universal score, every bank and HFC has different criteria and minimum credit score. But generally, a credit score above 750 is considered good by the majority of financial institutions. The score in the range of 350-750 is considered average or poor. Thus make sure that you check your credit score before applying for a loan.

credit-score-for-homeloan_loanyantraYour credit score reflects the following:

750-900    

  • Good score
  • You are likely to get loans at good interest rate
  • Both secured and unsecured home loans  can be easily availed by you

700-750    

  • Decent score
  • You are likely to get the loan from most of the banks but for unsecured loans, banks might conduct further review

550-700    

  • Low score reflecting delay in payment or irregular payment
  • Banks are usually dicey about approving loan
  • You might get your loan approved by some loan provider but at a higher collateral and low LTV
  • You might have to pay a higher interest rate

300-500

  • Poor score
  • Difficult to get loan especially from an established Bank or HFC
How is a Credit Score Calculated?

By now, we know that credit score plays a key role in home loan processing and approval.  You can check your credit rating on CIBIL’s official website by paying a nominal fee of around Rs. 470.

CIBIL’s Credit Score is calculated based on the following factors:

  • Repayment history of applicant: This accounts for 35% of the score. Hence make sure that you have cleared all your bills and loans. This helps in maintaining a good repayment history.
  • The credit balance:  This accounts for 30% of your credit score. This includes two factors, first how much credit has been sanctioned to you and second how much of that limit you have used. The credit utilization ratio is the balance which is outstanding on your loans and credit cards. If you have used most of the credit limit, you are considered a risky customer.
  • The duration of time for which you have used credit: This accounts for 15 % of the credit score. If you have taken for a long term and have been repaying the EMIS on time, it positively affects your credit score.
  • Application for new credit or availed new credit: This accounts for 10% of the score. Every time you make an application for credit, the lender checks your credit and if there are too many credit inquiries in line it can negatively impact your score.
  • Credit mix: This contributes 10% of the it. You should have a mixed bag of secured and unsecured loans, having a mix of both increases your credit score.
What if my credit score is low, how will I improve it?

There is a probability that your credit score might be low and bank rejects your application. However, this can be avoided if you work on the following steps:

  • Check your credit report regularly- Make sure you check your credit report regularly. It intimates you about any kind of defaults or delayed payments so that you can rectify it on time.
  • Timely repayment – The best way to keep your credit score right is repaying your credit on time. Timely and responsible payment affects your credit score positively.
  • Do not consistently apply if your credit has been previously rejected- In case your application has been rejected, give yourself some buffer time and then apply. Too many applications at a time can negatively impact your credit score.
  • credit-score-repair_loanyantra-comEnsure that you have a mixed bag of loans- While applying for loans do check that you have availed both secured and unsecured loans. Secured loans include car loans or home loans and unsecured loans include personal loan and your credit card as well.  Having both kinds of loans impacts your credit score positively.
  • Beware of joint application – In case you become a joint applicant with someone and that person defaults or have a poor credit score it might affect your credit score as well.

Always ensure that you are positive w.r.t Credit Score. Once you are on a safe side, it shows you are eligible for any kind of loan.

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