Buying your dream home is like achieving a major milestone in your life. After you have done your research and decided on a location to buy your house, the next hurdle that you need to cross is to get the approval of finances. There are various factors that are considered by the lenders to determine your eligibility for the loan. Your credit score is the most important among them. Your credit score is a three digit number that summarises the information in your credit report. Your past repayment history, outstanding debts, credit utilization ratio, credit mix, length of the credit history are some major factors that determine your credit score. All lenders look at this number to understand your financial standing and determine the risk associated with you as a borrower. It gives them a quick impression of your probability of default based on the past behaviour. Most financial institutions have a minimum criteria that one needs to satisfy in order to get approved for the loan. Different banks have different guidelines relating to the minimum credit score that they are willing to accept depending on their risk tolerance. But in most cases, a home loan gets approved if your score is more than 700.
A high CIBIL score is an indication that you have serviced your past obligations diligently. It is a reliable measure of your future repayment behaviour and hence it improves your chances of getting a loan. A low score that does not satisfy the minimum limit set by the bank may lead to a denial. So if you wish to avoid any chances of rejection, you must pay attention to your CIBIL score and ensure that it stays above the 700 mark.
Your credit score not only affects the bank’s approval decisions, but it also determines the home loan interest rate that they will charge. Yes, banks in India are now planning to switch to risk based pricing, where they will charge a lower rate of interest from people with an exceptionally high CIBIL score. They believe that lending to an individual with a fairly high score will be a good investment as he won’t have problems in repaying the debt. Loans for low CIBIL score are available at a higher rate as lending to such individuals is considered as a riskier investment. Bank of Baroda has already announced that it has linked home loan interest rates with the CIBIL rating. So if you maintain discipline in paying your existing loans, your credit score will improve, and you will have to pay a lower EMI on your new loan.
If you are planning to buy your house anytime soon, checking your credit score should be your top priority. Do it at least 6 months prior to filing a home loan application, as it will not only help you gauge your financial standing but also give you enough time to work on your score if it isn’t in a good shape. If may be extremely devastating if you find out that your credit rating is too low to qualify for a home loan. Do not worry, all is not lost. Many peer to peer lending options are available online where you can get loans for low CIBIL score. But these loans will be available at a higher cost. A difference of even half a percentage of home loan interest rate can cost you thousands of more rupees over the life of the loan. It is in your best interest to work on your CIBIL score and improve it so that you can get approved for home loans at attractive rate of interest.
Make sure you make timely repayment of your instalment debts from now on as late payments pull down your score. Get a secured credit card and use it for small purchases every month. Timely payments of the credit card bill will help in establishing a good track record of the payments made that would be reflected in your report. Do not utilize more than 30% of the available credit limit. Check your free credit report every year to ensure that you are moving in the right direction. Also scrutinize your report to make sure it does not have any errors. Sometimes errors on the part of the credit bureau are also responsible for a low CIBIL score. So if you find any discrepancies you can raise a dispute with CIBIL.
Raising your CIBIL score will not happen overnight. But if you focus on taking positive actions you can slowly move up the ladder and make your CIBIL score ready for an easy approval of home loan at attractive interest rates.