A home loan is a type of secured loan, where a person borrows money from a bank or a financial institution with the intention of buying or building a house. Since it is a secured loan, the lenders will require some kind of collateral against the loan (such as mortgaging the property, or holding the deed) until the loan amount has been paid back with interest.
When approving such loans, banks usually check a person's credit score in order to determine their creditworthiness, or their ability to repay the borrowed money on time.
An individual’s credit score, also popularly known as CIBIL score, is a three-digit number between 300 and 900 that is calculated using a person’s credit history by the four licensed credit bureaus (TransUnion CIBIL, Experian, CRIF High Mark, and Equifax).
These scores are used by banks to decide whether or not to process a home loan application. Credit bureaus collect your credit history data – including payment history, existing debt, credit utilization. When you apply for a home loan, banks will obtain this data (through credit score and credit reports).
While there is no universal minimum score for home loans, every bank has a cut-off point to decide whether to accept or reject applications. Generally, a credit score or CIBIL score of 750 and above is considered good for home loan approval.
This is how your credit score or CIBIL score might affect your loan approval:
|
Credit Score |
Effect on Your Loan |
|
750 – 900 |
Good scores mean a high chance of your home loan requests being approved, The approval process will be quicker, and you will be in a position to negotiate better interest rates. |
|
600 – 749 |
Average scores can still get approved for a home loan. However, lenders will consider other factors like monthly income, existing loans, employment stability, etc, The approval process will take longer and you will likely not get the best interest rates |
|
300 – 599 |
Low scores and poor credit history will reduce your chances of getting a loan, But those few lenders who do offer you home loans might give you lower loan amounts, high interest rates, or request collaterals, If you get rejected, you need to improve your credit score to be eligible for a loan |
You can still get a home loan even when you have a low credit score. Or even if you have no credit history (this is when your score is noted as NH/NA because you have not had any prior loans/credit cards).
Generally, you should try to improve your credit score before applying for a home loan. But, if this is not possible, you can try one of the following:
However, remember that loan approvals usually depend on many other factors, and these methods might not ensure approval if your credit score is low.
If your application for a loan has been rejected, try to improve your credit score before applying for a loan again. Immediately applying for loans with another lender will reduce your score further.
Having a good score can be very beneficial, and help assure that banks will extend you a loan. So, here are some ways to improve your credit score:
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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