How does CIBIL Score affect your Home Loan Application?

Buying your dream home is more than finding the right property. Given the rising cost of residential properties in India, it is a major investment. According to a recent study, housing prices in the country recorded a 5.9% year-on-year growth in the third quarter of 2023.

IIFL Home Loans help you realize your homeownership dream without draining your savings. Many factors, such as age, income, and employment status, determine your home loan eligibility. However, your CIBIL score plays a crucial role in the loan approval process.

This blog highlights the impacts of your CIBIL score on loan applications and explains how to increase your score. Read ahead for more details.

What is a CIBIL Score?

CIBIL score is your credit score calculated by the Credit Information Bureau India Limited (CIBIL). It is a 3-digit numeric snapshot of your credit history and ranges between 300 and 900. It shows your repayment capacity and creditworthiness. Thus, the higher your CIBIL score, the higher your chances of obtaining home loans at competitive rates.

How does CIBIL Score affect Home Loan Applications?

Your CIBIL score impacts your home loan application in the following ways:

1. Application Rejection

If your CIBIL score is poor, say, below 500, lenders may reject your application even if you have a reasonable income and stable employment. Your loan approval chances drop further if your income is low, or you have multiple existing debts.

Besides, when you apply for a loan, a hard inquiry is initiated against your permanent account number (PAN), further lowering your score.

Conversely, if your CIBIL score is above 750, your home loan may get sanctioned faster because lenders perceive applicants with high credit scores as financially responsible and low-risk borrowers.

2. Higher Interest Rate

If your CIBIL score falls between 650 and 750, your application may be approved, but at a higher home loan interest rate. Simply put, the rate will be higher than that offered to individuals with a credit score between 750 and 900. Thus, your equated monthly instalments (EMI) and total debt servicing costs increase.

The interest rate is higher for applicants with lower credit scores because lenders assume a higher default risk when lending to such persons. Also, other factors, such as your profile, loan amount, property type, etc., contribute to the margin being higher or lower at onboarding time.

3. Smaller Loan Amount

Lenders look at a borrower's income and credit score to determine the loan amount to be sanctioned. The lower your income and CIBIL score, the smaller the loan amount you receive, and vice-versa.

4. Lower Loan Tenure

If your CIBIL score is high, you can get flexible repayment tenures of up to 30 years. Longer loan tenures lower your EMIs, making it easier to manage other financial obligations. But if your credit score is low, lenders will sanction loans for shorter tenures. Your monthly cash outflow increases, leaving you with lower savings to meet other expenses.

5. Lower Negotiation Power

When your credit score is low, it is harder to negotiate favorable loan terms, such as longer tenure, competitive home loan interest rates, and larger loan amounts.

How to Boost your CIBIL Score

Below are some tips and tricks to increase your credit score:

• Pay your existing loan EMIs and credit card dues on time.

• Do not close your current credit card accounts, even if you may not be using them much.

• Choose a longer tenure whenever you take a loan. As EMIs will be lower, your chances of delaying, missing, or skipping payments will decrease.

• Do not apply for multiple loans within a short period or re-apply for the same credit cards despite rejection.

• Check your credit report regularly. If you spot errors, get them rectified immediately.

• Maintain a healthy credit mix, comprising secured and unsecured loans.

• Ensure your credit utilization ratio is below 30%.

Bottom Line

Checking and improving your CIBIL score is paramount before applying for a home loan. Higher credit scores help you obtain favorable loan terms, while lower scores make your home loan journey tougher. Thus, actively manage your credit to maintain a strong CIBIL score.

IIFL Home Loans offers housing loans starting from ₹2,00,000 at affordable rates with minimal documentation. For more details, visit IIFL Home Loans today!

FAQs

Q1. Does CIBIL score affect home loans?

Ans. CIBIL scores significantly impact the likelihood of home loan approval and the terms offered by lenders.

Q2. What is considered a good credit score for a home loan?

Ans. Usually, lenders prefer applicants with a CIBIL score of over 750.

Q3. Who can apply for a home loan?

Ans. Any salaried or self-employed resident Indian aged between 18 and 75 years with a minimum CIBIL score of 700 can apply for a home loan.

Q4. Do lenders sanction a home loan for a low CIBIL score?

Ans. Obtaining home-buying loans for bad credit is tough. To improve your home loan eligibility, take a co-borrower with a high credit score, as lenders consider the CIBIL scores of both applicants while sanctioning loans. You can also boost your credit score before applying/re-applying for loans.

Q5. Which type of home loan is better if your CIBIL score is sub-par?

Ans. Usually, fixed interest-based loans are sanctioned at slightly higher rates. Floating interest-based loans are tied to the Benchmark Prime Lending Rate. The interest rates on these loans change as per market conditions. Thus, if you have a sub-par credit score and expect rates to fall in the future, a floating interest-based home loan is better.