Home loans offer several benefits. To start with, these are low interest rate loans that allow borrowers to afford their dream home and pay for it in a systematic and affordable manner. Home loans also come with a long repayment tenor — borrowers can repay the loan money over a period extending up to 30 years. This further eases the burden of loan repayment. Lastly, home loans offer several tax benefits and allow borrowers to claim tax deductions up to a maximum of Rs.3.5 Lakh in each financial year.
It is not surprising that popularity of home loans has increased majorly over the last few years. Today, almost all home buyers opt for a home loan to facilitate home purchase.
However, with more and more people opting for home loans, the cases of loan default are increasing too. Therefore, lenders have become wary about who they lend money to. All lenders have strict home loan eligibility requirements that borrowers must fulfil to be eligible for a home loan. These eligibility requirements take into account several factors, such as the borrower’s income, their age and the number of working years they have ahead of them, their debt-to-income ratio, etc. One of the main factors that affects a borrower’s home loan eligibility is their CIBIL score. In this article, we look at the CIBIL score impact on home loans.
What is CIBIL Score?
TransUnion CIBIL is the most popular credit rating agency in India and the credit rating it assigns borrowers is known as the CIBIL score. The CIBIL score varies between 300 and 900. Lenders in India require borrowers to have a CIBIL score of at least 750 to be eligible for a home loan.
Individuals who pay loan EMIs on time
Individuals who always pay loan EMIs and credit card bills on time, maintain a low debt-to-income and credit utilization ratio and have a healthy mix of both secured and unsecured loans have a CIBIL score between 750 and 900 and borrowers who have such a CIBIL score not only get approved for loans quickly but also have high negotiating power over lenders. Such borrowers are able to avail of loans at low home loan interest rates, can even negotiate for a higher loan sanction and a longer home loan repayment tenor to simplify the process of loan repayment. Borrowers who have a serious attitude towards credit but have missed one or two EMI payments in the past or have a high credit utilization or debt-to-income ratio have a CIBIL score between 700 and 750. While borrowers with such a CIBIL score do get approved for a loan, lenders may charge a high rate of interest on these loans. They may even ask home loan borrowers to repay the loan over a short tenor to minimize chances of loan default. Borrowers with CIBIL score below 700 are seen as highly risky borrowers by lenders. Such a CIBIL score belongs to those who have missed EMI payments in the past and therefore, cannot be completely trusted with timely repayment of loan money. Lenders usually reject applications from such borrowers. In case they approve an application, they do so at high interest rates to cover up the risk involved.
Now that we understand the CIBIL score impact on home loans, let us look at what borrowers can do to improve their CIBIL score.
Simple Tips on How to Improve CIBIL Score to Enhance Home Loan Eligibility
If your CIBIL score is below 750, do not worry. Here are a few things you can do to improve your CIBIL score and bring it up to 750 or higher.
– To start with, make it a point to have a clean payment history. This means make it a point to never miss an EMI payment or a credit card bill. Your credit history makes up 35% of your CIBIL score. Maintaining a clean repayment history helps build a good CIBIL score. However, keep in mind that being consistent for just a month or two won’t do much. Stay on track for at least six months and then expect any changes.
– Maintain a low credit utilization ratio. Borrowers who maintain a credit utilization ratio of 30% or less have a high CIBIL score. The question is how does one maintain a low credit utilization ratio? The answer is simple. Clear the entire amount due on your credit each month and not just the minimum amount due. Further, do not exhaust the limit on your credit cards, if you do not plan on clearing the entire bill at the end of the month.
– Borrowers who have a healthy mix of both secured and unsecured loans have a high CIBIL score. Thus, have both types of loans in your kitty. If you have a secured loan, such as a home loan, avail of a small unsecured loan, such as a personal loan to enhance your CIBIL score.
– Limit credit card and loan applications. Borrowers who apply for too many loans and credit cards are seen as high-risk borrowers by lenders and have a low CIBIL score. If you are trying to improve CIBIL score, do not apply for a new credit card or a loan for some time.
– Lastly, sometimes, people’s CIBIL score also goes down due to wrong information passed on to credit information agencies by lenders and financial institutions. Thus, check your credit report from time to time and make sure there are no errors in it.
The CIBIL score impact on home loan approval as well as the terms and conditions of the loan is massive. Thus, borrowers planning to avail of a loan must make sure they have a CIBIL score of at least 750. If their CIBIL score is below 750, it is best to wait a while and use the tips mentioned in this article to improve their CIBIL score first and then apply for a loan.