When a financial institution receives a loan application, it needs to ensure that the applicant has the capacity to pay it back. To confirm their repayment capacity, the lenders ask applicants to submit a few necessary documents, from their bank statements and salary slips to income tax returns. While these documents help borrowers check the applicant’s income, they check the credit score to gauge their repayment habits and credit behaviour. Home loan lenders determine an applicant’s housing loan eligibility based on their CIBIL score, income, repayment capacity, and several other factors.
When it comes to the CIBIL score, it is a 3-digit number that TransUnion CIBIL calculates based on an individual’s repayment history, outstanding balances, financial obligations, credit utilisation, etc. Lenders get an idea of the applicant’s credit-related behaviour by checking their credit score. Those with a higher CIBIL score of 700 or above can borrow an ample loan amount at lower interest rates. Still don’t understand why a CIBIL score is so significant when applying for a home loan? Here is some crucial information one must know.
Role of CIBIL Score in a Loan Application
After scrutinising the applicant’s income stability thoroughly, financial institutions determine the loan amount, period, EMI schemes, and interest rates. High-risk candidates that have a history of missing payments or defaulting on loans do not get easy approval for any further credit. An individual’s CIBIL report contains all credit-related information, including spending patterns, repayment behaviour, overdue, lenders’ remarks, default history, loan enquiries, etc. That is why the CIBIL score is of utmost importance while applying for a home loan.
Clean history with a satisfactory credit score enables an applicant to negotiate the loan amount and home loan interest rate with the financier. On the other hand, a low CIBIL score adversely affects loan eligibility. Therefore, a high credit score helps a lender in many ways while approving home loan applications:
– Understand the Applicant’s Credit Behaviour
From the loan types taken in the past to the ones they are currently paying, lenders want to see how their applicants handle their credit. CIBIL credit bureau calculates credit scores not just using the loans they take but also from how they use their credit cards. With an applicant’s credit score, lenders gain an insight into how much the applicants use their credit cards, their credit utilisation ratio, and whether they timely repay their loan EMIs and credit card bills without defaulting. Simply put, the CIBIL score gives the lenders a detailed look into how applicants manage their credit.
– Assess the Applicant’s Loan Repayment Capacity
While applying for a home loan, the applicant must prove their housing loan eligibility. Evaluating income sources is an excellent way to check if an applicant is eligible for a loan and how much. Home loan lenders expect their borrowers to comply with their minimum income requirement. Applicants who do not draw a certain amount of minimum income each month are ineligible for a loan. The credit score helps a lender decide if an individual can repay the EMIs on time, which is why the CIBIL score is of utmost importance to determining home loan eligibility.
– Check Financial Obligations
Applicants with high ongoing loans often project themselves as high-risk borrowers to the lenders. Taking a new loan adds to their financial responsibilities while their income does not increase. Lenders use the credit score to calculate an individual’s capacity to repay another loan within their monthly budget. They check the applicant’s debt-to-income ratio, and the percentage of monthly income they spend on repaying other loan EMIs and credit card bills. If the DTI ratio exceeds 50%, lenders may consider an applicant ineligible for a home loan.
What to do If the CIBIL Score is Low?
An applicant must have a CIBIL score of 700 or above to qualify for a home loan. Those who have a lower score than that must follow these tips to improve it fast:
- Check the credit report and file any errors for fixing
- Always stay consistent with the loan EMIs and credit card bill payments
- Retain old accounts to prolong the credit history
- Pay off existing debts and outstanding balances to reduce the debt-to-income ratio
- Avoid using credit cards to reduce the credit utilisation ratio
- Borrow different loan types to diversify the credit portfolio
As it must be clear by now, the CIBIL score is vital in determining housing loan eligibility. Those with a lower credit score need not worry or fret. Maintaining financial discipline and using the tips mentioned here makes it easy to improve the CIBIL score and loan eligibility to buy your dream house.
