The financial year 2022 witnessed lenders advancing approximately ₹2 trillion in home loans. What’s more surprising is that this value is in line with the pre-COVID era. Furthermore, the high value of borrowed amounts hints at the rising importance of investing in homes among Indians.
With banks and NBFCs flooding the market, availing a home loan to purchase or build your dream home is no difficult task. While you may be spoilt for the choice to select the right home loan lender, there are a few basic criteria you must meet when applying for a loan. One of the essential parameters among those is your CIBIL score.
Checking your CIBIL score for a home loan is critical as lenders assess your creditworthiness based on this parameter. That is precisely why a CIBIL score for a home loan is considered one of the most crucial parameters. After all, lenders need assurance of your repayment behaviour.
However, are you aware of certain factors that can affect your CIBIL score and your home loan approval thereafter? Read on to learn about them.
CIBIL Score: What is it?
Your CIBIL score is a 3-digit numeric representation that measures your repayment ability, depending on your past credit transactions. Your CIBIL score falls within the range between 300 and 900.
While a score closer to 750 and above is considered good by most lenders, having a score less than 650 may be regarded as a low score. A low CIBIL score can hamper the process of loan approval and may even lead to rejections.
For a better understanding, here are factors that affect your CIBIL Score.
Your Credit History Length
Your history with credit is a marker of your financial health and impacts your CIBIL score. This contributes to approximately 15% of the total credit score calculation. It implies, to the lender, that you have been availing credit for a significant period.
It also enables lenders to assess your credit management skills. You can understand this better by considering it analogous to a tree. Just as a tree that has been around has a stronger foundation, similarly, a lengthier credit history implies better responsibility toward loan repayment.
This is why it is crucial not to close your old credit accounts, even if you no longer use them. Having a considerably lengthy history can hasten the home loan approval process when compared to shorter credit history.
While the former helps lenders ascertain your repayment behaviour, a shorter one may turn out to be risky. If you are new to the credit system, you can still have a better score, provided you make timely payments.
Right Mix of Secured and Unsecured Credit
The type of credit you avail is another crucial factor that has an impact on your CIBIL score. Having the right blend of unsecured and secured loans can help you maintain an ideal CIBIL score for home loan approval.
While home or car loans are called secured forms of credit, a credit card or a personal loan are referred to as unsecured credit options. Secured credit simply means you pledge collateral to avail of such loans.
On the contrary, unsecured credit does not require you to pledge any security, so you can get such credit options quickly. When you borrow both kinds of loans, it helps lenders understand that you are adept at managing both credit forms.
This helps you build a positive CIBIL score by strengthening your credit history and creating a creditworthy profile for the lender. Remember that around 10% of your credit score depends on this parameter.
Your Credit Utilisation Ratio
This is yet another critical factor affecting 30% of your CIBIL score, as it reflects your need for availing credit. The cardinal rule here is to maintain a conservative ratio, below 30%. This is considered ideal for building a higher credit score.
As the name implies, this ratio is calculated based on the amount of credit you use as opposed to the total credit sanctioned by the lender. When you cross the 30% mark, you are viewed as someone that is overly reliant on credit.
This, in turn, may have a negative impact on your score, affecting your home loan approval process. Hence, make sure you maintain a lower credit utilisation ratio to avoid any issues during the home loan approval process.
Your Payment History
Amongst all the essential factors affecting your CIBIL score for home loan approval, this is a crucial one to consider. In fact, it is one of the factors lenders assess when reviewing your application.
Lenders check whether or not you are a responsible borrower on the basis of your credit repayment history. For instance, if you are someone missing out on your monthly installments, your CIBIL score can take a major hit.
Moreover, it implies that lenders can’t trust you to repay on time, and this can delay your home loan approval. Hence, paying your monthly EMIs on time is critical to maintaining a healthy credit score and impressing potential lenders.
Total Number of Credit Inquiries
There are generally two types of credit inquiries, called soft and hard inquiries. When you check your credit report regularly, it is known as a soft inquiry. Conversely, if the lender checks the report, it is called a hard inquiry.
Each time you apply for a new credit option, there is a hard inquiry initiated. This remains active on your credit report for a maximum period of up to 2 years. You need to be mindful of the total number of credit inquiries you accumulate over a specific period.
This is because it may give false assumptions to lenders that you are hungry for credit. Moreover, hard inquiries lower your credit score temporarily. As such, multiple inquiries will lower it considerably.
A strategic approach to tackle this is by keeping a tab on the number of times you apply for credit. This lets lenders know that you are a responsible borrower who can efficiently manage finances. It also helps build a positive CIBIL score and increases your chances for home loan approval.
Understanding various factors affecting your CIBIL score is crucial before you apply for a home loan. This helps you maintain a good score of above 750 and establish a solid credit profile to achieve financial goals.