Buying and owning a house is almost every person’s dream. But not everyone has the means to pour life into this dream and make it a reality. Buying a house requires a lot of financing, apart from just all the other planning and research that goes into it. However, in today’s world, it is possible to achieve this dream with help from outside, i.e, a home loan. But can anyone and everyone get a home loan of an amount that they wish and at an interest rate that they favour? Well, the short answer is no. It is not easy and at the same time it is not the most unachievable goal. In this blog, we shall discuss what is the CIBIL score required for home loan and how to apply for a home loan with a low CIBIL score.
Documents required for a home loan application
Before one starts the home loan application process, it is important to first keep a few documents ready for the process to begin. The documents required are :
- CIBIL or credit score and CIR (Credit Information Report).
- Bank statement of past 3 to 6 months.
- Income receipts of the past 3 months.
- IT returns for the past 3 years.
- Property papers.
- Self attested KYC documents for proof of identity, address and signature.
Securing and keeping all the required documents ready avoids delay in the process of home loan application. The process will be initiated without any hurdles, so one must not skip this essential step of documents collection.
Ideal CIBIL/Credit score for a home loan
CIBIL (Credit Information Bureau of India Ltd.) Score or credit score is a three digit numeric representation of an individual’s creditworthiness as issued by TransUnion CIBIL, the most popular and accepted credit rating agency present in India and approved by the RBI (Reserve Bank Of India). It is the most widely accepted credit scoring company apart from the other three present in the country, namely, Experian, Equifax and High Mark. The CIBIL score ranges from 300 to 900, 900 being the highest and 300 being the lowest.
An ideal credit score for a home loan would be 750 and above but this is not absolute. 650 is considered to be the minimum CIBIL score for home loan. There are different ranges with varied advantages and disadvantages, let’s deep dive into the question of CIBIL score required for home loan:
- 300 – 599:
- 600 – 749:
- 750 – 900:
A credit score in this range reduces the chances of securing a home loan by a large margin. It gives the lender a disappointing picture of the repayment capabilities of the borrower and decreases the borrower’s creditworthiness. It represents a bad credit history. If the lender is ready to give a loan, it would only be a small amount of money with a high interest rate or against collaterals such as fixed deposits, assets and shares. If the lender is not ready to give money, which mostly would be the case, the individual has to first improve his/her credit score and then apply for a home loan. Long story short, this range is considered to be a low CIBIL score for home loans.
This credit score range is definitely better than the previous one. This paints a better credit history of the borrower to the lender and gives a sense of assurance to the lender of the repayment capability of the borrower. To be able to be eligible for a home loan with this credit score, other factors like monthly salary and job stability are considered. These are the factors which reiterate the belief of loan repayment. As a rule of thumb, 650 is considered to be the minimum CIBIL score required for home loan.
This is the best bracket to be. The chances of securing a home loan are the highest. There is negotiating power in the hands of the borrower in terms of the principal amount and rate of interest. There is an option to choose the best available offer rather than take what is given. This is the ideal credit score for a home loan and anyone who wants to apply for a home loan, should strive to achieve this credit score.
Relationship between CIBIL score and eligibility of home loan
There is a directly proportional relationship between CIBIL score and home loan. The higher the credit score, the higher the chances of securing a home loan and here is how that plays out :
- Credit health and credit score:
- Rate of interest and principal amount:
A good credit score is reflective of a good credit history, which means a good track record of past repayments. This acts as an assurance to the lender to lend money to the borrower. It increases the creditworthiness of the borrower and the whole process of home loan application becomes quicker and hassle free.
The higher the credit score, the higher the amount of loan amount and lower the rate of interest. As discussed earlier, negotiating power comes into play with a good credit score, which then allows the borrower to choose a favourable loan option with a low interest rate and high loan amount. The application is also processed quickly without any hindrance.
Eligibility of CIBIL defaulters for a home loan
CIBIL defaulters are those who have defaulted on loans or EMIs and therefore have a low credit score. Like the first bracket score discussed earlier. So yes, they are definitely eligible for a home loan but the chances are slim. A low credit score cuts out a sorry figure for the lender of the borrower’s repayment ability and this creates hassles in the loan application process. In order to avoid getting a low loan amount and a high rate of interest or to even be accepted for a home loan, the borrower can inculcate good financial habits such as paying loans and EMIs on time and in full amount, increasing income or even opening a joint account with someone who has a good credit score as a guarantor.
Steps to avail a home loan and improve credit score
There are a few steps to follow before applying for a home loan. They include :
- Checking credit score:
- Checking for errors:
- Keeping a check on the number of lenders approached:
This is the first and foremost step to be followed. This can be done by visiting the official CIBIL website and opting for either the yearly once free option or yearly multiple times paid subscription plan. Once you enter all the details and fill a form, the CIBIL score will be mailed to you within 24 hours.
After you get the credit score, it is important to go through it thoroughly to check for mistakes and incongruity in transactions and statements. If any errors are found, then a CIBIL dispute can be raised which is a multi step process that takes around 30 days to complete. So it is good to do this step in the initial stage itself.
It is important to not apply for home loans with many lenders because an application rejection at one lender can negatively affect the credit score at other lenders. The best option is to maintain the ideal credit score for the home loan approval.
Apart from these steps, there are ways to improve credit score which ultimately is the most important step in this whole process. They are :
- Pay loans and EMIs within the stipulated time and in full amount rather than just paying the minimum due.
- Keep the old credit cards as they are reflective of a good credit history and do not apply for many credit cards at once and eliminate the ones with low balance.
- Keep the credit utilization to around 30% and never above 50%.
- Choose the auto-debit option if you know you may forget to make the payments every month but be sure to maintain the required balance in the account.
- Do away with unflattering financial habits such as taking cash advances, applying for a home too many times with too many people, etc. This negatively affects the credit score and reduces the chances of securing a loan.