Why is a Credit Score Crucial For Your Home Loan, And How Can You Ameliorate It?
No matter what type of loan you desire or want to apply for, lenders require you to ensure your repayment capacity. For confirming your capacity to repay, they usually ask you to put forward different documents from bank statements and salary slips to your income tax returns and even factor in your credit score. A credit score is nothing but a 3-digit number that assists lenders to understand how frequently you can borrow credit sums and whether you are paying the loan periodically. Credit scores are particularly crucial to apply for a home loan. Before we move into the details to explain why a credit score for a home loan is important, let us explain what CIBIL score is and how you can conduct a credit score check online through various digital platforms.
What is CIBIL score?
What is CIBIL score is one of the most asked questions, especially by those with no credit score or who are new to credit. CIBIL score is nothing but a 3-digit numeric summary of your credit history. The CIBIL score is derived by using your credit history that is found on your CIBIL report, also called CIR or credit information report. The CIR refers to an individual’s repayment history across loan
kind and credit institutions over a time period. Here are why lenders usually ask to view your credit score to purchase a home and why it is crucial.
Importance of credit score for getting home loan approval
Listed below are major reasons why lenders or creditors factor in your credit score.
. It assists lenders to know your credit behaviour
From distinct kinds of loans you have availed in the past to those you are currently repaying while applying for a home loan, lenders view how you have handled your credit. CIBIL score is calculated not only from the loans you have availed but also based on how you have used your credit cards. Lenders get insight into how much you use your credit card, how much is your CUR (credit utilization ratio) and whether you have repaid both your current loan and credit card dues on time without defaulting. As such, the CIBIL score endows your
lenders with a detailed look at how you can manage all types of your credit.
.It assists lenders to view if you have the repayment capacity for loan
When you make an application for a home loan, you require proving your eligibility. One of the prudent ways to know whether you are eligible is via your income sources. Lenders need you to comply with minimum income needs. If you draw a specific monthly income, you might not be eligible for the home loan. Your credit score and income assist lenders in determining if you can repay your home
loan within the due date, which is why the lender factors in your credit score for a home loan.
.It assists lenders to view if you have any ongoing loan
Applicants with ongoing loans, while they can apply for another loan, are looked upon as risky by the lenders. A new loan means a type of additional financial responsibility while your income stays the same. Via credit score, lenders compute if you can timely repay your high-value home loan. Also, they check whether your loan to value ratio or LTV, i.e., monthly income drawn, and the money spent in making payment of your credit card bills and other loans EMIs. If your LTV ratio or loan to value ratio surpasses the 60 percent mark, lenders
consider you not eligible for the home loan
.
How can you ameliorate your credit score?
The credit score required for the home loan is a minimum of 750 points out of 900 points. Here is how you can simply ameliorate your cibil score.
∙ Make sure you do not have any outstanding debts
No matter whether it is any other credit option or your recent credit card bill, make sure you repay them all before you submit your home loan application. Not having outstanding debt, just like the credit card cycle, can assist you in availing of the home loan approval passed.
∙ Do not use your whole credit limit
The next medium to ameliorate your credit score for home loan application approval is to ensure you do not use up your whole credit limit. Lenders ensure to sanction a loan to those applicants who do not use over 30 percent of their credit limit. As such, you should restrict your credit utilization ratio or CUR to 30 percent. It simply means that if you have a credit limit of Rs 1 lakh, you can just
use Rs 30,000 of the sanctioned limit on your credit card every month.
∙ Ensure to repay your debts without committing any delay or defaults
This is one of the sure ways to ameliorate your credit score to timely repay your debt without any default or delay. Make sure you never ever miss any of your EMI payments and avoid repaying them late. Also, ensure not to only repay the minimum amount required for credit card debts and timely pay off your whole amount before the new credit cycle starts. In case the lender views any default on your past debt, your home loan can instantly be rejected. It is because delays and defaults lower lenders trust in you. Reduced trust makes them doubt your capacity to repay the loan within the due date. Few lenders accessing your higher default rate concerning other loans may consider offering you a home loan at a higher interest rate. They do so to compensate for their higher credit risk.
Ending note
The credit score for a home loan must be 750 and above. Many of the lenders, particularly the bank, are very rigid and just sanction the loan to borrowers who achieve this minimum credit score. HFCs or housing finance companies, on the contrary, are lenient regarding credit scores and might approve home loans of applicants with lower credit scores below 750. But while you may avail the loan approval from HFCs, the rate of interest offered is usually on the higher end.
