Before sanctioning a loan, a lender ensures that the borrower can repay it on time. That is why it asks the borrower to submit certain documents, such as income proof, address proof, bank statements, etc. Another thing that lenders do is evaluate the credit score of the borrower
A credit score – also known as a CIBIL score – is a three-figure number that helps a lender understand the repayment capability of a borrower and know whether they have repaid their previous loans on time or not.
The minimum credit score for a loan may vary depending on the lender and the type of loan. For example, a lender may ask for a higher credit score for a personal loan as it is an unsecured loan. However, the required credit score criteria for a home loan can be a bit relaxed.
Importance of credit score for a home loan
Although the minimum CIBIL score for a home loan is usually lower than a personal loan, it still plays a crucial role in determining the loan amount and the mortgage rating. The following are the main reasons that explain the importance of the home loan credit score:
It helps a lender understand the borrower’s credit history.
Since a home loan involves a large sum of money, a lender conducts several checks before sanctioning it. Apart from verifying property details, it evaluates the borrower’s credit history by looking at their credit score. This helps them understand how frequently a borrower has taken loans and whether they have repaid them on time or not. By checking a borrower’s credit score, a lender also gets an insight into how responsibly a borrower has handled their credit. If a borrower has maintained a low credit utilization ratio and has repaid all their debts on time, their chances of getting a home loan approval increase
It helps a borrower prove their eligibility to the lender.
Each lender has its own eligibility criteria for a home loan. These may include certain requirements in terms of age, location, monthly income, employment status, and credit score. The required CIBIL score for a home loan may range anywhere between 700 to 900. Borrowers with good credit scores may find it a lot easier to get home loans, and that too, at the lowest interest rates. It is because a healthy credit score reflects that the financial condition of the borrower is sound, and they can repay their home loan EMIs without defaulting.
It helps a lender calculate a borrower’s LTV ratio.
A lender may want to know the existing financial obligations of a borrower before approving their home loan application. If a borrower is already struggling with too many EMIs and other responsibilities, there is a high chance that they will default on their home loan repayment. The CIBIL score of a borrower reflects their outstanding debts. After knowing the current financial responsibilities of a borrower, a lender calculates their loan-to-value (LTV) ratio to evaluate if they will be able to pay their home loan EMIs or not. Generally, an LTV ratio of 50% or less is considered satisfactory by lenders for approving home loan applications.
How to improve one’s credit score for a home loan?
As one can see, a good credit score is necessary to fulfil the eligibility criteria for a home loan. But what if a homebuyer must have the minimum credit score for a loan? Here are the steps that they can take to improve their CIBIL score:
- One should apply for a loan only when it is necessary. Applying for too many loans has a negative impact on the applicant’s credit score.
- One should check their eligibility before applying for a loan. If a lender rejects a borrower’s loan application, it causes a decline in their credit score
- One should ensure timely repayment of loan EMIs and credit card bills. Any delay or default in loan repayment can hamper one’s credit score badly.
- One should use their credit card wisely. By keeping their credit utilization ratio below 30%, one can provide a significant boost to their credit score.
- One should keep checking their CIBIL score at frequent intervals. In case they notice a discrepancy with their credit score, they must inform the credit rating agency immediately
Conclusion
Usually, the best credit score for a loan is 700 or above. However, some lenders provide loans for low credit score borrowers, but they may charge them a higher interest rate. That is why one must ensure a good CIBIL score before applying for a fresh home loan. If someone’s credit score is below the satisfactory level, they should take immediate steps to improve it.
Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim/disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
Table of Contents
