The CIBIL score is one of the most crucial factors that determine a homebuyer’s eligibility to qualify for a home loan. The higher the CIBIL score of a homebuyer is, the greater one’s chances of getting a home loan from a lending institution.
That is why every homebuyer must assess questions like what is a good CIBIL score for a home loan and how the CIBIL score is calculated before applying for a home loan.
What is a CIBIL Score for a Home Loan, and How is a CIBIL Score Calculated?
The CIBIL score is a three-digit number that reflects the creditworthiness of a homebuyer and is measured on a scale of 300 to 900, with 300 being the lowest possible score and 900 the highest.
The Reserve Bank of India (RBI) has authorised the TransUnion Credit Information Bureau of India Limited to calculate the CIBIL score for home loan borrowers in India. It typically follows the Fair Isaac Corporation’s (FICO) method for this, which means collecting information from various sources and then adding weightage to them.
The factors that are taken into consideration for the calculation of the home loan CIBIL score are as follows:
Credit history of the homebuyer
The credit history is the most dominant factor that impacts a homebuyer’s CIBIL score, carrying a weightage of 30%. It refers to their past repayment record of loan EMIs (monthly instalments paid for the repayment of a loan) and credit card bills.
If a homebuyer has not paid their loan EMIs or credit card bills on time on multiple occasions, one’s CIBIL score gets hampered severely. For example, if a homebuyer has repeatedly missed loan EMIs for two to three months or if their credit card bills are delayed by more than 60-90 days, their CIBIL score goes down by almost 100 points.
However, a single instance of delayed EMI payment or credit card dues in 2-3 years does not impact one’s CIBIL score.
Credit utilisation ratio
The credit utilisation ratio is another crucial parameter used to calculate the CIBIL score, carrying a weightage of 25%. It refers to the ratio of the total spending made by the homebuyer against the available credit limit.
If a homebuyer frequently keeps a high credit utilisation ratio, it impacts their CIBIL score adversely. Ideally, one should try to maintain a credit utilisation ratio of 30% or lower to ensure an optimum CIBIL score. The lower the credit utilisation ratio of a homebuyer, the better their CIBIL score will be.
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Credit mix and duration
Credit mix refers to the composition of secured and unsecured loans in a homebuyer’s credit portfolio. Secured loans are those that can be repaid by selling an asset. Examples of secured loans include car loans and home loans. Whereas unsecured loans are taken without any security or collateral. For example, personal loans, credit cards, etc.
If a homebuyer has maintained an appropriate balance of secured and unsecured credit, it leads to a positive change in one’s CIBIL score. However, if the value of unsecured loans exceeds that of secured loans in a homebuyer’s credit portfolio, it can impact their CIBIL score adversely.
Additionally, the credit duration of a homebuyer also impacts the calculation of their CIBIL score. It refers to the combined age of all their credit accounts. If one has a steady credit duration of five years or more, it signifies that they are experienced in handling credits, and hence, boosts their CIBIL score.
Credit mix and duration have a combined weightage of 25% on the overall CIBIL scores of home loan borrowers.
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Other factors
Apart from the ones mentioned above, TransUnion considers certain other factors to calculate the CIBIL scores for home loan borrowers in India. These factors include the total number of active credit accounts and recent credit inquiries, among others. Applying for too many loans or credit cards within a short duration may lower a homebuyer’s CIBIL score.
These factors account for the remaining 20% weightage in the calculation of the CIBIL score.
To Conclude
Although the minimum CIBIL score for a home loan varies from lender to lender, it usually ranges between 750 and 900. Moreover, by maintaining an adequate CIBIL score, one can secure a higher home loan amount and the best rate of interest from lending institutions.
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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.
