All About CIBIL Score—Its Significance and Ways to Calculate it

CIBIL Score or credit score is one of the significant factors considered while sanctioning home loans. Thus it is essential to have a good credit score to approve a home loan; if the credit score is in the poor range, the bank might deny it.

When you start with a home loan procedure, you must have heard some terms repeatedly. The words like CIBIL Score for a home loan, minimum CIBIL Score, and more come up in the home loan process. So, what exactly is a good CIBIL score for a swift home loan approval? In this article, let's learn everything about the CIBIL score required for a home loan.

What is the CIBIL Score?

CIBIL Score specifies your eligibility for securing a loan. Credit Information Bureau India Ltd. India's first credit rating agency evaluates your credit history, creditworthiness basis, repayment habit of dues on loans, frequency of loan applications, ongoing loans, and several other factors.

Your Score is the outcome of complex mathematical analyses based on the data about your credit history documented in CIBIL's database. This data also gets reflected in every loan applicant's CIR (Credit Information Report).

CIBIL has been authorized by the Reserve Bank of India and is supervised by Credit Information Companies (Regulation) Act, 2005. This Score is estimated on a scale between 300 and 900, with 300 being the lowest and 900 being the highest. Therefore, the minimum CIBIL Score a borrower, typically needs to retain to be easily eligible for a loan is 750.

How is CIBIL Score Calculated?

For calculating the Credit Information Bureau India Ltd. Score, the whole credit history of the person is analyzed. This majorly comprises the number of loans taken and regularity in repayments of loans, along with other parameters. These parameters are evaluated based on the weightage assigned to them and the applicant's performance in them.

4 Major Factors for Calculating the CIBIL Score

1: Past Performance

Past performance has a thirty per cent weightage to the overall Score. In addition, the previous repayment record of the loans the person availed is considered, which is deemed the most significant criterion in estimating the Score.

Visible patterns of irregularity in the payment of EMIs reduce the Score on this parameter. Missed EMIs, and credit card dues paid after the due date outcomes in a lower score.

It is to be reported that cutting just one EMI by thirty days does not lower the Score. Payments postponed once or twice in two to three years do not significantly influence the CIBIL Score. But, repeated irregular expenditure, including missing EMIs for two to three months consecutively or postponing the payment of credit card dues by sixty to ninety days, decreases the CIBIL score by around a hundred points.

Also, missing more than three EMIs, or delaying credit card dues by more than ninety days, results in involving recovery agents by the banks, which significantly reduces the CIBIL score, which can't be corrected for seven years.

2: Credit Type and Duration

This has a twenty-five per cent weightage to the overall Score. This parameter contains two parts- one which depicts whether the credit availed was secured or unsecured; and the total period since the first credit availed by the person. Secured credit means a loan taken against any investment. In easy terms, the lenders can sell off the asset in case of loan default.

It is advisable to have a balance of secured and unsecured credit. Nonetheless, more unsecured credit also contributes to a lower score. Also, the availability of a steady credit history for at least twenty-four months puts into the Overall Score. It signifies that the person is used to taking credit and is aware of its repayment.

3: Credit Exposure

Credit Exposure accounts for twenty-five per cent weightage to the overall Score. It is also known as the Credit utilization Ratio, which is the proportion of the total spent to the available credit limit. In easy terms, credit exposure depicts the person's dependency on credit for living their life.

While a credit exposure of thirty per cent is considered perfect, a higher credit exposure ratio is deemed harmful and causes the Score to be lower.

4: Other Parameters

The other parameters account for the remaining twenty per cent weightage. These comprise parameters like the number of loans or credit cards applied. A high number of loans within a short time, irrespective of those being authorized, lower the credit score. In easy terms, even constantly applying for loans adversely affects the credit score.

4 Significance of CIBIL Score For Home Loan

1: Defines Your Credit Health

Evaluating your credit health or creditworthiness gives people an idea about your capacity to repay the debt on a home loan. A high CIBIL Score assures them you can reimburse the home loan within the stipulated period.

On the other hand, a low score is proof of poor credit history, making the person sceptical of your capacity to repay the loan. Nonetheless, a low score reduces your likelihood of being eligible for a loan but does not contradict the chances. Such loans are offered at a low amount and heavy interest rate, along with various terms and conditions.

2: CIBIL Score Implications

A score of 750 expedites the loan procedure and makes the person eligible for a higher loan amount and better interest rate, and that too from a wider span of lenders. The loan is processed, and the loan payment is disbursed into your account in a brief period. A higher score means more incredible eligibility for a home loan with a better loan amount and a lower interest rate.

3: Determines the Rate of Interest on Home Loan

With a good CIBIL Score, the person will be in a situation where he can mediate with lenders to bring down the interest rate. Also, more lenders would show interest in providing him with a home loan with a good credit history, enabling the person to choose the one that is providing them with the best deal.

In contrast, a low score decreases your likelihood of being eligible for a home loan, and it takes away your chance of negotiating the loan amount and rate of interest. It does not leave you with an option but to accept the amount of a low loan and high-interest rate the lender gives.

4: Specifies the Home Loan Amount

A good score will facilitate you to be eligible for a higher loan amount for the same reason that you can command a lower rate of interest, which is not feasible if you have a low score. The lenders would provide a lower loan amount if you have a lower score than they generally do.

What are the Documents Required for Verification of Home Loan Eligibility?

Borrowers have to submit certain documents while applying for home loans to support their eligibility for reimbursement of debts within a stipulated time. Though these documents may differ between lenders, the following are the documents needed for verifying a person's eligibility for a home loan:

• CIBIL Score
• Bank Statements for the last three to six months
• Self-attested KYC documents
• Salary slips for the previous three months
• Property Papers
• IT Return of last three years

6 Ways CIBIL Evaluates Home Loan Eligibility

CIBIL examines your eligibility for a home loan based on the following factors:

1: Payment History

Lenders assess for frequency of payment overdue cases and defaults in payments, which act against a borrower for loan approval.

2: CIBIL Score and Report

It is one of the most vital factors that specify the chances of loan approval since it determines the borrower's credit health.

3: Income and Employment Status

These details enable the lender to assess the borrower's ability to reimburse the debt if the loan application is ratified.

EMI to Income Ratio

Borrowers are more likely to ensure a loan with an EMI that is not more than fifty per cent of their monthly income, and this will be lower if the person already has other loans to repay.

4: Account Information

Lenders thoroughly examine the number of suits and those written off.

5: House Location

Some lenders may assess your eligibility for a home loan basis the area of the house for which the person wants the loan.

6: Property Papers

Suppose a person has property papers that do not have any document of disputes related to the land or home. In that case, they are more likely to be eligible for a home loan for the same property.

Tips to Improve Your Home Loan Eligibility

If a person wants to apply for a home loan, here is what they should do to enhance their eligibility for securing it:

• Eliminate utilizing Credit Cards with low balances by reimbursing them as soon as possible. You could also transfer them to another existing card. This will enable you to deter your CIBIL Score from falling.
• Pay the monthly dues on the Credit Card within the stipulated due date monthly and keep away from reimbursing just the minimum amount due. This is because carrying the remaining balance to the following month will lead to heavy interest and affect your Score.
• If there is a chance of missing out on the payment of dues inadvertently, opt for an auto-debit. This will allow your lender to debit the loan from your account monthly on a fixed date.
• If a person has an ongoing loan, pay the dues within time monthly to enhance their Score and set a good credit history.
• Remember to read the loan document correctly and clear your doubts before signing to prevent you from being seized and unaware.
• Eliminate financial conduct that implies risks to good credit history, such as taking cash advances on Credit Cards. This alerts lenders about the borrower facing financial stress.
• Check the credit report before applying for a home loan to ensure no transaction problems. If you find inaccuracies, get them corrected by raising a CIBIL dispute before applying for a home loan.
• Do not be a loan guarantor. If the person defaults in reimbursing dues on time, it will not only impact the records, but you might also have to pay the debt on their behalf.

Conclusion

The word CIBIL score is synonymous with a credit score, a significant factor considered while ratifying a home loan. A person with a good credit score can also get a lower interest rate; nonetheless, an individual will commonly get a higher rate if there is a poor credit score. In addition, your CIBIL score is influenced by loan EMIs, default credit card payments, or hard inquiries. Therefore, it is recommended to calculate your credit score before applying for a home loan.