How Can Current Loans and Credit Report- CIBIL Impact Your Loan Eligibility?

For an individual planning to take a loan, it is a pre-requisite to be aware of the factors impacting loan eligibility.

The post talks about 2 primary factors affecting your likelihood of getting a home loan - "Existing Loans and Credit Score". Keep reading to find out more.

Owning a house is a life goal for the majority of Indians.

As per a report published by Economic Times, the property prices to monthly income ratio in India as of March 2019 rose to 61.5 times. An immense gap, isn't it?

Home Loan can help you bridge this gap.

Here are the factors that can impact your home loan eligibility and how you can improve it.

Impact Created by Your Existing Loan

Lenders do not consider your complete income as EMIs. This is because you need to meet your monthly expenses and other commitments out of your income. Hence, lenders generally accept an EMI to Income Ratio of 60-70%. The same can even be extended to 100% at times

If you are also serving an existing loan, the maximum EMI that can be charged from you will be reduced. As a result, your home loan eligibility will also take a hit because of reduced EMIs. Let's understand it with an example.

Suppose your monthly income is Rs. 50,000. EMI to Income Ratio is taken as 50%.

In Case -1, you pay Rs. 10,000 as EMI towards an existing Car Loan, and there is no loan in Case-2.

Clearly, your home loan eligibility is greatly reduced due to an existing loan on your account.

Tip: You can improve your home loan eligibility by repaying your existing loans before making an application.

Impact Created by Your Credit Score

From the lender's perspective, identifying a responsible borrower is important to reduce bad loans. How can they check the credit behaviour of a borrower?

Here comes the role of a credit rating agency. A rating agency provides credit scores to individuals based on their credit history and repayment behaviour. Typically, a credit report tracks the history of the last 7 years.

You can get a maximum score of 900. Usually, lenders accept 750 or above as a benchmark score. On the contrary, a low credit score represents irresponsible credit handling and uneven repayment patterns. Hence, lenders avoid giving loans to people who have an unstable credit history.

Credit Score can also play a big role in deciding your home loan interest rate . The lower your credit score, the higher is the interest rate charged. Hence, it is important to regularly monitor your credit score.

Measures to Improve Your Credit Score

Looking at the impact of credit score, it is certain that your success in getting a home loan depends on a good credit report. So, here is how you can improve your credit score and ensure that your home loan application is accepted.

1. Do Not Make Too Many Loan Applications

When you apply for a loan, by default, the lender checks your credit report. Frequent enquiries reduce the credibility of your report, and hence the score also gets reduced.

2. Make Regular Loan Repayments

It is the primary factor hampering your CIBIL. Usually, there can be 2 scenarios.

1. Scenario – 1: If an EMI becomes overdue, your credit score starts to fall. In case it remains unpaid for 90 days or more, it slips into the category of an NPA.

Once this happens, your credit score reduces at a faster rate. The day when you start repaying consistently, your credit score starts moving upwards.

2. Scenario – 2: When you are financially unable to repay the loan, your lender might write off the debt or agree to settle the account for a reduced payment.

The loans written off or settled are separately marked on the credit report. If your report contains this indication, your loan application most probably gets rejected.

3. Limit Credit Card Usage to 30% and Repay Within the Due Date

Ideally, rating agencies consider a Credit Utilisation Ratio (CUR) of 30% or less to be favourable. Thus, if you hold a credit card and your limit is Rs. 1 Lakhs, you should not use more than Rs. 30,000. Using more credit implies that you are credit hungry. At the same time, you can also repay all your credit card bills on time to ensure a better credit report.

4. Check Your Credit Reports Once in a Year

One free credit enquiry is provided by each rating agency every year. Hence, you can easily check your credit report occasionally and improve your overall score. When individuals consider their own credit score, it is considered a soft inquiry and doesn't impact the credit score negatively. However, repeated enquiries made by lenders or creditors, which are considered hard enquiries, can impact your score negatively.

Several rejected home loan applications either have a low credit score or the loan amount requested is less than the eligible amount. In either case, being proactive and keeping a clean track record can brighten your chances. So, follow the above steps before making the first move towards your new house.