Do you know that one of the key variables taken into account when approving a home loan is the CIBIL Score, often known as a credit score? To be eligible for a house loan, a person must have a decent credit score; otherwise, the bank may deny the loan application. A credit score between 750 to 900 is considered decent. A credit score below 500 is considered to be poor.

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How does CIBIL score work?

A person’s creditworthiness for a home loan is shown by their CIBIL Score, which is a credit score provided to both individuals & businesses by TransUnion CIBIL.

Based on a person’s credit score, banks and other financial organizations determine whether it is feasible to provide them a home loan. The CIBIL score, which ranges from 300 to 900, is determined by the applicant’s history of loans taken out and repaid. The likelihood that a person will be approved for a home loan increases with credit score.

For a better understanding of the many credit ratings that are available and their significance in obtaining a home loan, read this article. Lenders determine an applicant’s eligibility for a home loan based on a number of additional factors in addition to their CIBIL score.

How is the CIBIL Score Determined?

The full credit history of the person is examined to determine the CIBIL Score. This primarily comprises the total amount borrowed (including credit card debt), the regularity of loan repayments, and other pertinent factors. These factors are evaluated depending on the importance given to them and how well the candidate performed on each of them.

4 major variables are used to calculate the CIBIL Score:

Previous Performance: The weighting of the past performance is 30% of the final score.

The most crucial factor in determining the score is the applicant’s historical payback performance on any loans and credit cards they have taken out. Visible patterns of erratic credit card or EMI payments lower the score for this criterion. A lower score is the result of missed or bounced EMIs and late payments for credit card balances.

The score is unaffected by a single missed EMI or a 30-day delay in credit card payments. Once or twice in every 2-3 years of late payments have little to no impact on the CIBIL score.

However, frequent instances of irregular payment, such as skipping EMIs for a period of two to three months in a row or paying credit card bills late by 60 to ninety days, lead the CIBIL score to drop by about one hundred points.

Additionally, banks will send out collection agents if you skip more than three EMI payments or postpone credit card payments by more than 90 days. This drastically lowers your CIBIL score, which CANNOT BE RECORRECTED FOR 7 YEARS! The COVID-19 epidemic offer and other EMI holidays and moratoria, however, do not take into consideration irregular payments.

Duration and Credit Type: This contributes 25% to the final score.

This characteristic consists of two parts: the length of time from the person’s first credit purchase and whether the credit obtained was secured or unsecured. A loan backed by any asset is referred to as a secured credit. Simply said, in the event of a loan default, the lenders may sell the asset. For instance, two

Housing loans, car loans, etc. Unsecured loans are those that are obtained with no end-use limitations. For instance, a personal loan or credit card. Having a mixture of secured and unsecured credit is advised. Yet having more unsecured credit also lowers your score.

Also, the overall score is increased by the presence of a consistent credit history going back at least 24 months. It shows that the applicant is accustomed to obtaining credit and is aware of how to return it.

Credit Exposure: 25% of the final score is based on credit exposure.

The term “Credit Utilization Ratio” is often used. It is the proportion of total expenditures to the overall credit limit. Simply put, a person’s credit exposure shows how dependent they are on credit to get by in their daily lives.

A higher credit exposure ratio is viewed negatively and lowers the score significantly, even though a credit exposure of 30% is desirable.

Additional Parameters: The remaining 20% of the weight is determined by these parameters.

These factors include, among others, recent repayment patterns (over the previous six months), the amount of loans or credit cards that have been applied for. Regardless of whether they are approved, applying for a lot of loans or credit cards in a short period of time (between 6 and 12 months) lowers credit score.

A good CIBIL score

The range of CIBIL scores is 300–900, with 300 representing the lowest & 900 representing the greatest. The likelihood of receiving a house loan is higher the higher the score. Banks prefer a CIBIL score between 700 and 750 before approving a home loan. Although different banks may have their own requirements for a minimum score, most Indian banks want at least a 700.

Banks view borrowers with credit scores in the 650–700 range as fairly risky and may provide them a smaller Home Loan amount or higher interest rates than they would typically grant to a candidate with a score over 700. Lenders are hesitant to offer home loans to candidates with credit scores below 650 because they are seen as high risk.

However, credit scores below 650 can be raised to a level that banks will accept using a variety of strategies, such as regularizing credit repayments, paying off previous loans in full as soon as feasible, and waiting 6 to 12 months before making any new loan applications, among others.

Additionally, there may be some instances of postponed loan repayment due to legitimate and unforeseen circumstances, such as technical difficulties encountered when deducting the loan EMI from the borrower’s bank account, delays in receiving credit card bills or statements, etc., which could lower the borrower’s CIBIL Score. You can submit a Credit Repair request to CIBIL in these circumstances, detailing the specific instances of delays, and have your CIBIL score updated.

Advantages of a High CIBIL Score

A high CIBIL score is always advantageous and gives the loan buyer an advantage. The following are some advantages of having a high CIBIL score:

• If the loan buyer has a high CIBIL score, they will have better or more negotiating leverage.
• A high CIBIL score enables you to obtain a house loan at extremely low interest rates.
• You can haggle to have your desired house loan amount approved.
• A high CIBIL score aids in accelerating the loan application and disbursal processes.

Can I Still Obtain a Loan If I Have a Poor CIBIL Score?

If your CIBIL score is poor, you can still apply for a loan, but the process can be time-consuming. A low CIBIL score indicates a greater chance of payment default in your situation. In these situations, various things could happen, such you could need to provide more documentation, the lending banks might charge you a high interest rate, or they might not be able to approve the loan amount you need. In order to get a decent CIBIL score, you must be sure to adhere to excellent financial habits.

CIBIL Score for those who have never had credit

Moreover, the credit score for some people with no or little credit history may range from -1 to 5, depending on their risk level as determined by CIBIL. They consist of:

• candidates who are new to borrowing and whose credit histories have been unavailable for more than six months. These situations are known as No History (NH), as well as the applicants receive a score of -1. (minus one).
• Applicants without a history of timely loan or credit card payments during the previous 24 months. These candidates receive a score of 0 (zero) and are labelled as having “Credit History Not Available” (NA).

In these situations, the business calculates a score from 1 to 5 depending on the risk factor of the individual using the CIBIL TransUnion 2.0 technique. A number of 1-2 indicates the lowest likelihood that a loan will default, a score of 3 indicates a moderate likelihood, and a score of 4-5 indicates the highest likelihood.

CIBIL TransUnion 2.0 considers a number of variables, including age, income, marital status, education, repayment history over the previous six months, and recent loan applications, among others.

Some Advice for Improving Your CIBIL Score

• To prevent any EMI bounces, make sure your bank account has enough money in it.
• Pay off all of your credit card debt. DO NOT MAKE MONTHLY PAYMENTS OF JUST THE MINIMUM AMOUNT. Maintain a NIL/minimum Credit Balance at all times, if at all possible.
• Prior to the due date, pay your credit card balance. Don’t wait until the last minute.
• Don’t use up all of your credit. Use no more than 40% of your available credit.
• Refrain from using several credit cards and loans. Always choose a secured loan over an unsecured loan, such as a personal loan or credit card.
• Do not reapply for the same loan or credit card with different banks for a year if you have previously been rejected.

Conclusion: How is CIBIL Score Determined for Home Loan?

Credit score is a synonym for the term “CIBIL score.” It is a crucial component that is taken into account when approving a mortgage. A person can potentially get a cheaper interest rate if they have good credit, but they will typically get a higher rate if they have bad credit. Defaulted credit card payments, missed loan payments, and hard inquiries can have an effect on your CIBIL score. We suggest that you determine your credit score before requesting a mortgage.

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