Individuals applying for a home loan must know that the CIBIL score is one of the important eligibility parameters for a loan application. It is a three-digit numeric (ranges from 300-900) summary of an individual’s credit history and reflects their creditworthiness. The higher the number, the higher one’s possibility of getting faster home loan approval.
This score depends on several factors that can ultimately determine home loan eligibility. The following section discusses the factors affecting CIBIL Score for home loan.
What are the factors that affect the CIBIL score for home loans?
Several factors affect the CIBIL score for home loans. They are:
- Irregular payment
Payment history and behaviour have a significant impact on CIBIL Score. Delayed payment or even non-payment can negatively impact one’s credit score and reduce it by high points.
According to a report, a 30-day delinquency can lower one’s credit score by 100 points. Therefore, individuals must pay dues on time to maintain a decent credit score for housing loans.
However, managing multiple credit cards and loans can be a bit hectic. To avoid incidents like this, they can set alarms or reminders and pay dues timely.
- High credit utilisation ratio
The credit utilisation ratio is another crucial factor that decides an individual’s credit score. It refers to the amount of revolving credit individuals are utilising divided by the total amount of revolving credit available.
Ideally, individuals must keep the credit utilisation ratio below 30%. For instance, if individuals have a credit card limit of Rs. 1 lakh, they must spend around Rs.30000. A low credit utilisation ratio testifies that an individual uses less of the available credit and can keep a check on spending.
This credit behaviour creates a notion among credit rating agencies that the particular borrower in question can efficiently manage credit by not over-spending. If they use Rs.60000 instead of Rs.30000, it can affect their CIBIL Score highly. Further, lenders may take this pointer negatively as this can lead to default risk.
- Errors in the credit report
A credit report is a document that shows a person’s credit history and includes details of credit accounts, such as credit cards, auto loans etc., taken from registered financial institutions.
Sometimes these reports can reflect erroneous data due to mistakes made by financial institutions while entering data or other reasons. Hence, borrowers must check credit reports periodically to keep track of errors.
Credit bureaus such as CIBIL provide a free credit report once a year. Borrowers can find incorrect information and delay in updating essential details in the report. Once individuals identify mistakes on the report, they can report and rectify them instantly. This will help to improve the credit score and chances of getting a home loan without any hassle.
- Multiple hard enquiries
Checking credit scores can negatively affect the overall score. This is not applicable in the case of soft enquiry when borrowers check their own credit scores. However, when lenders conduct several hard enquiries within a short span of time, it can affect credit scores negatively.
Lending institutions carry out hard enquiries when individuals apply for credit cards or loans. Therefore, too many applications in a short time span will automatically result in hard enquiries and present the borrower as a credit hungry person. These events can lead to loan rejection.
As this data stays on a credit report for two years, prospective borrowers of home loans must be careful while applying for the loans within a short time. To ensure faster and guaranteed approval, individuals must check home loan eligibility criteria beforehand and then apply for it to avoid loan refusal.
- Lack of ideal credit mix
Lack of mixed credit can influence one’s CIBIL Score for a housing loan. Individuals must know that borrowing history with more secured loans and less unsecured loans can work in favour of them.
Paying off loans and credit card bills simultaneously can be overwhelming. However, if individuals can manage payment of these two variants of financial instruments, they can boost their credit score at a fast pace.
If individuals can show a history of payment of EMI on secured loans and credit card bills, the lending institution can report this repayment behaviour to credit rating agencies. These agencies will then increase credit scores and issue a report with detailed information on the timely payment of multiple EMIs and credit card dues.
- Age of credit card
Lending institutions use a credit report to assess the past credit behaviour of borrowers, and, depending on this data, they approve loan applications.
Total years credit accounts have been active can affect credit score. Though this practice is not as important as other pointers mentioned, it can help build an excellent credit score. This becomes possible, especially if the old account has a history of on-time payments.
Thus, individuals willing to apply for a housing loan must keep the old account record (if any) in the credit report active to maintain a decent credit score.
Renowned lending institutions provide eligible individuals with a high-value home loan at improved terms and rates.
These financial institutions also provide a pre-approved offer to simplify the loan availing process. These offers are also applicable for other financial products such as loans against property, home loans, etc. Individuals can check their pre-approved offers by entering names and contact details.
An ideal CIBIL Score for home loans is 750 or above. Since individuals now know the factors affecting CIBIL Score for housing loans, they can try to maintain the required number to ensure a faster loan approval.