There was a time when different lenders had their own internal assessment criteria for sanctioning the loan. But today there has been a marked shift in the method of evaluating a loan application. Thanks to the credit scoring agencies, that keep a comprehensive database of the borrowing history of each individual and help lenders to make an informed decision. If you own a credit card or if you have ever taken a loan before your entire credit information and payment patterns are recorded by the credit bureaus. Based on this information the bureaus prepare a credit report. The positives and negatives in your report sums up your basic borrowing behaviour and affect your CIBIL score. When you submit a home loan application the lender will check your CIBIL score and analyse your payment behaviour on the past and present credit facilities availed by you. This helps him to assess the risk associated with lending you money. A high score makes the lender take a positive view of your application. Hence your CIBIL score plays a major role in obtaining a positive approval for a home loan. Every bank has a cut-off indicator to accept or reject applications. For example in case of SBI home loans you need a minimum CIBIL score of 750 to qualify. This makes it essential for you to monitor your score regularly. In fact all home loan seekers should order their CIBIL report and check the credit score to see if they will qualify before applying for an SBI home loan.
Until recently the CIBIL score was only used as a qualifying criteria. If the minimum CIBIL score required to obtain a loan is 750, then your application was most likely rejected if you had a score of 680. But 2 individuals with a credit score of 750 and 800 would be eligible for the loan at the same rate of interest. Since the mark up over the bank’s base rate was very thin, differential pricing based on credit score was not very common in retail loans in India.
But now risk based pricing is slowly gaining grounds in the banking industry. This essentially means that the rate of interest on home loan will be based on the creditworthiness of an individual. Since a good score reflects sound financial health and low risk profile, banks are willing to lend such applicants at a comparatively lower rate of interest. Since the probability of default is very less banks are prompted to lower the interest rate for such low risk applicants. So very soon your CIBIL score will not only improve your chances of approval but also help you to negotiate lower rate of interest with the bank.
In fact Bank of Baroda has taken the first move. It has decided to reward customers with exceptionally good credit record. Since a high CIBIL score reflects financial discipline in terms of timely repayments, it will be used to determine the EMI of the home loan. The BoB home loan interest rates are directly linked to the customer’s credit history. Hence your credit score will not only decide your eligibility for BoB home loan but also the final price that you pay on the loan. If the score is above 760 points you can get a home loan at 8.35%. While a score between 725-759 will fetch an interest rate of 8.85%, a score less than 720 points will attract an interest rate of 9.35%. Bank of Baroda’s home loan rate of 8.35% is the lowest among all banks. In comparison an SBI home loan is available at a flat rate of 8.65% without considering the credit score. Such a move will ensure affordable access to finance to borrowers who have always made on time payments. It will not be long when other banks will follow suit and link the CIBIL score with the home loan EMIs.
Since a home loan is a long term liability and involves a big sum of money, even a small reduction in interest rate translates into huge savings for the borrower. This gives you all the more reason to work on increasing your credit score. So maintain discipline in repaying your existing liabilities. As your credibility increases so will your savings on your home loan.
But if you have a poor credit score and are unable to secure a home loan from the leading banks, start working on your credit behaviour. But remember getting your credit life back on track takes time and patience. If you need funds while you are working on your bad credit situation you can look for loans with bad CIBIL score.