With growing concerns about borrowers defaulting on home loan repayments, lenders in India nowadays take their eligibility criteria very seriously. They approve the home loan applications of only those individuals who meet their minimum requirements regarding age, income, employment history, etc.
While these factors give the lenders a fair idea that you have a stable income and the financial capacity to make the monthly EMI (equated monthly instalments) payments on time, when you wish to avail a home loan from NBFC (non-banking financial company), they also do a thorough background check of your credit history.
The lender checks if you have been responsible for loan repayment in the past. To identify your creditworthiness, they look at your credit score. If you are a first-time home loan borrower and unsure what your credit score for a home loan is and how it impacts the home loan interest rate and your chances of getting approved, then this guide is just for you.
What is a credit score?
Nowadays, many credit bureaus in the country, like CIBIL (Credit Information Bureau India Limited), maintain a record of all your credit-related transactions. Based on how promptly you repay the credit, including loans and credit card payments, they assign a three-digit score, which is called the credit score. Since CIBIL assigns the credit score, it is also known as the CIBIL score.
This score helps the lenders assess whether you are a creditworthy borrower or not. The score ranges between 300 and 900. And the closer your score is to 900, the more responsible borrower you are, and the better your chances of getting home loan approval with more favourable terms and conditions.
Generally, most lenders have a minimum CIBIL score for home loan requirements. While it may vary from one financial institution to another, lenders prefer lending money to only those with a CIBIL score of 750 or more.
Impact of credit score on home loan approval
Your credit score can significantly impact whether your home loan application is rejected or approved.
- Application rejection
Credit score and home loan application rejection are deeply connected. If your credit score is below the minimum score required by the lender, say 500, they may reject your application even if you have a high income and stable employment history. Your chances of getting a home loan may diminish further if you have any existing debt.
In addition, when you apply for a home loan with any lender, they initiate a hard inquiry about your credit history. If you have defaulted even on a single EMI payment in the past, your score will be further lowered.
Conversely, if your credit score is high—more than 800—the lender may approve your home loan application faster and be willing to offer the loan with more favourable terms and conditions.
- Higher interest rate
The home loan interest rate varies from one lender to another. However, the lender may still approve your loan if your CIBIL score exceeds the minimum required score. However, to compensate for the high risk they take in lending you the amount, they may offer the loan at a higher interest rate.
Simply put, the interest rate levied on your home loan will be higher than that offered to another individual with a higher credit score of more than 800 for a similar home loan amount and repayment tenure. So, when your interest rate increases, consequently, the EMI amount will also increase.
- Smaller loan amount
If your CIBIL score for a home loan is lower than the minimum score required by the lender, the lender may consider you a risky borrower and not be willing to sanction the loan amount you want. Instead, they may approve only a smaller amount based on your income.
- Lower repayment tenure
Generally, the CIBIL score required for a home loan is about 750 or more. If your CIBIL score meets this requirement, the lender will allow you to choose the repayment tenure based on your repayment capacity. You can choose the maximum repayment period, i.e., 30 years.
The longer your repayment duration, the more affordable your EMIs will be, and you can easily make the payments. But if your credit score is low, the lenders may not be willing to take the risk of granting you along for a longer period.
The longer the repayment period, the higher the risk they bear. So, they will approve the loan only with a shorter tenure. This means you will have to pay a higher EMI, which may affect your regular cash flow, leaving you with lower cash to meet other regular expenses.
How can you boost and improve your credit score?
Now that you know how credit score directly impacts loan approval, you may also want to know how to improve or boost your credit score.
Improving your credit score is a lot easier than you can imagine. All it takes for you to be disciplined with your finances. Here are a few tips that can help:
- Try to pay off all your existing dues, including loans and credit card bills, on time. As you continue to make the payments, your credit score will slowly and automatically improve.
- Don’t apply for multiple loans simultaneously or within a short duration. The lender will conduct a credit inquiry when you apply for a loan. If multiple lenders initiate the inquiry simultaneously, it will reflect that you are credit-hungry and lower your credit score. So, if one lender has rejected your loan application, wait for at least 4-5 months before you try applying for a loan again.
- Check your credit report regularly, and if you spot any errors, raise the issue with the credit bureau immediately and get it corrected.
- Always maintain a healthy mix of secured and unsecured loan
Final Word
A credit score is a critical aspect of getting a home loan. Before you approach any lender, do your homework about how much CIBIL score is required for a home loan by a specific lender, and apply with only those lenders with a minimum score requirement closest to your current score.
Always trust only established lenders. They have a reputation for offering housing loans starting from Rs. 2 Lakh at affordable rates of interest and have simple eligibility requirements.
