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23 August, 2016
In today’s date, having an own house to live is on everyone’s wish list. This is one asset that a person aspires for and saves for. No doubt whatever amount of money you have saved for making the down payment of your dream home, you will always want everything to go right and in place before giving an application for a home loan.
There have been tremendous changes in the loan market in the last few years. The central banking authority of India and the RBI have made it mandatory for all the lending institutions to check the applicant’s credit score as a part of their credit assessment process before making any kind of lending. It is very important for the borrower to maintain a good credit score before applying for any kind of borrowings from the bank.
What is credit score?
CIBIL credit score is a credit report given by the widely accepted credit reporting agency (Credit Information Bureau India Ltd) which needs to be assessed before giving a loan. It is three digit numeric explanation of your previous credit history and is computed by taking into account a person’s complete details, including borrowing history, repayment discipline, other loans and credit cards held if any, and defaults in repayment discipline or credit cards payments. It also reflects your credit utilization and the number of inquiries made in case of both secured and unsecured loan. Measured on a scale of 300-900 points, 900 denotes a good repayment history and excellent chances of getting a loan whereas a lower score of 300 denotes discrepancies in the previous repayments.
For a home loan, a score of 700 and above is normally considered to be a good score and if you are close to 900, the bank will have more faith on your home loan repayment capacity. In case a person has a good CIBIL score and meets all other requirements of the bank for availing a home loan, it makes them eligible to get finance of up to 85% of the total value of the property.
Normally every bank decides upon a minimum cut-off score that is required for giving a home loan. A score of 750 and above is a good score, below 350 is poor and out rightly rejected whereas 350 -750 is an average score and maybe unaccepted.
Importance of CIBIL report in getting a home loan:
A CIBIL credit report is considered to be very important for the processing of home loan applications. A good CIBIL score will act as your first impression before the lender indicating your credit worthiness and will help the banks to approve and process your home loans faster and easier.
• The CIBIL report determines your eligibility to avail a home loan as good score will help you in availing a loan without any hassles.
• A good CIBIL score also helps you get the best possible rates as the higher the score, the better the interest rates.
• A good CIBIL score helps you avail higher amount loans and gives you more negotiating power.
Factors affecting the CIBIL score:
• Any kind of cheque bounce in the previous loan tracks
• Default in credit card payments
• Irregularity in previous loan repayments
• Too many loans or liabilities
• Default as a guarantor
• Multiple loan applications made earlier is also not a good sign
How is my CIBIL score calculated for home loans:
Before processing a home loan application, the bank will obtain their credit report from CIBIL. CIBIL collects and systematically organizes a persons’ complete data and provides the same to the bank or a financial institution. This information is respectively collected from all other banks and credit institutions who are its members, on a monthly basis. Thus based on this, a CIBIL Report is prepared and a credit score is given. These scores help the banks and financial institutions to decide whether a loan should be granted or not in order to avoid the overleveraged or risky customers thus reducing defaults.
Ways to improve your CIBIL well in time before applying for a home loan:
• Keep a check on your CIBIL score at least 6-8 months before applying for a home loan. In case it is not satisfactory, analyze the negative points and try eliminating them.
• Rectify all those errors that may lead to a low CIBIL score. In case there are some loans that are already closed but may be reflecting open in the CIBIL, collect a “No Due Certificate’ for the same and ensure that the records are set straight. At times if takes around a month for CIBIL to make changes at their end, so you need to keep a tap on the same.
• It is always wise to close a loan with regular repayment in order to show that you are a responsible borrower. So it is advisable to arrange finances before the due date.
• In case your CIBIL report does not have any errors but still the score is low, it could be due to a large outstanding amount reflecting in your report. In such a situation, it a better to clear the same as early as possible may be by liquidating some of your assets. But is important to have a satisfactory score by having a disciplined repayment pattern.
• One should avoid taking any new loan at least 6 months -10 months prior to applying for a home loan. In case you need one, try distributing the borrowing in the name of some other family member. One should not even make inquiries for the same as every inquiry made gets reported in the CIBIL as a “hard inquiry” bringing down your credit score.
• Not just the emi repayments, but one needs to be regular with credit card payments also.
• Credit utilization on your credit cards is another major factor that impacts your credit score. So before making an application for a home loan, make sure that your credit utilization is low to approx. 30-40%, as this will also help in keeping your credit score healthy.
Hence, for getting a home loan, one needs to prepare well in advance. It is important to make some extra efforts to improve your credit ratings so that the things process smoothly and you can make your dream come true.
Your CIBIL report might show some minor over dues only but it could hamper your future plans to avail bigger loans, as a bad or low credit report cannot be overlooked by any lending institution. It is better to say “NO” to credit card or other offerings rather than facing a failure in realizing your bigger dreams.
So get up to the reality and make the things perfect in order to live a financially healthy and happy life in the home of your dreams!!