Owning a house is a dream for many. If you have a good credit history and can set aside 35% – 40% of your monthly income for its EMI, you can easily be the owner of your dream home. All you need to do is apply for a home loan.
By 2027, twice the number of people are going to avail of home loans. Considering this fact, there will be a tight competition to avail of good interest rates from quality lenders. For such lenders, applicants with higher CIBIL scores are preferred.
So, if you’re planning to buy your own home in the near future, start working on your credit profile now. Read on to know more about building and maintaining a good CIBIL score for home loan approval.
What is a Good CIBIL Score for Home Loans?
Your CIBIL score is a number between 300 and 900, assigned by TransUnion CIBIL. It is based on your credit history, which is recorded in your credit report. Your credit can fall within a range, and mean different things when it comes to your creditworthiness.
Here is the effect of different CIBIL scores for home loan approval:
- 750 – 900
A credit score in this range makes you an attractive potential borrower. It indicates that you have managed debt successfully before, and that you don’t have any ongoing large debts to hamper your future loan repayment. This allows you to negotiate better interest rates for higher amounts. Also, your loan approval will be quick and easy.
- 650 – 749
A score in this range is considered average. Lenders will carefully consider other factors such as income levels, employment stability, and ongoing loans before making a decision. Also, interest rates will be higher and the approval process will take more time.
While there is no universal cut-off score, many lenders consider 650 as the minimum CIBIL score for home loans.
- 550 – 649
A score in this range significantly lowers your chances of getting a loan. Lenders offering you a home loan may charge exorbitant interest rates for smaller amounts. Before applying, try to improve your credit worthiness and lower your debt-to-income ratio.
This is your total monthly debt divided by total monthly income. A lower percentage indicates that you have more money available to repay potential loans.
- 300 – 549
A score in this range is considered poor, which means that you are not a good candidate for a home loan. It would be best to re-evaluate your credit situation, as most lenders will outright reject loan applications.
How to Run a Free CIBIL Score Check?
You can try out a free CIBIL score check online once a year, or multiple times in a year by paying a fee. You can run a free CIBIL score check on the official CIBIL website by filling a quick form. Simply enter your details regarding your identity, such as your date of birth, PAN number and mobile number.
Upon verification, you receive a free CIBIL score and a credit report detailing your credit profile. Online loan aggregators and lenders may even offer this service. Be vary of third-party service providers, especially since they may request your PAN information to process the free CIBIL score check.
Benefits of a High CIBIL Score for Home Loans
If you are planning to apply for a home loan, try to take time to build and maintain a high credit score. The benefits of doing so are:
- Lesser Interest Rates
You have more negotiating power if you have a high CIBIL score. You can ask the lender for a better interest rate and even to waive off certain fees.
- High Loan Amount Sanction
Lenders will be more inclined to approve larger loan amounts if you have a good CIBIL score. This lets you finance the purchase of your dream home without stress.
- Quick Loan Processing
The approval process is quicker for high CIBIL score applicants, since fewer checks are required to prove your creditworthiness.
How to Improve Your CIBIL Score for Home Loan Approval
Although home loans are secured loans requiring collateral, your credit score is important as it helps lenders determine the kind of borrower you are. Here are a few ways to improve your CIBIL score:
- Try to Repay Existing Debts
Having too many ongoing loans implies the risk of you not having enough funds to meet regular home loan EMIs. Before applying for a home loan, try to pay off whatever existing debt you can.
- Pay All Your Ongoing EMIs/Credit Card Bills on Time
Defaulting on EMI payments can reflect badly on your credit score. So, ensure you make all your credit card and other EMI payments on time, every time.
- Try To Boost Your Income
Try to plan your home loan in line with pay hikes and income growth. For lenders, higher income levels imply a higher loan repayment capacity.
- Lower your Credit Utilisation Ratio
Pay special attention to maintaining a low credit utilisation ratio. When you use more credit, your ratio increases, lowering your credit score if this ratio exceeds 30% of the total assigned limit.
- If You are a First-time Borrower, Build Loan History
As a first-time borrower, you can take a small collateral-free loan and repay it on time. This way you benefit by building a good credit history, for easier loan approval.
- Avoid Too Many Loan Enquiries Right Before Applying for a Home Loan
Each time a lender does a credit check to evaluate your eligibility for new credit, your CIBIL score dips temporarily. Before planning for a home loan, avoid other credit enquiries to improve your chances.
Alternate Options When You Have a Poor Credit Score
If your credit score isn’t great, but you still want to avail of a home loan, consider these options:
- Apply for a Joint Home Loan
To enhance your credit score, you can apply for a joint home loan with a co-applicant having a credit score of 750 and above. This does not guarantee loan approval, and depends on the lender.
- Apply for a Home Loan with Lower LTV
A lower LTV or loan-to-value ratio means that you take a loan for a smaller share of the home’s value, and fund the rest on your own. Ideally, the lender loans you 80% of the home value. However, with a low credit score, you can apply for a home loan with a much lower LTV.
The journey to becoming a homeowner is simplified by having a good credit score. However, a low score doesn’t mean you have to shelf your plans. Avoid rejection by carrying out a well-drawn plan to improve your credit profile.
There are many lenders offering various home financing solutions. To attain your home goals, make sure you do your research and ensure you get the best possible rates for your credit qualification.