What is the Credit Score Requirement for Home Loans?

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).

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:

• Look for another lender: Find another lender who might offer you a home loan at higher interest rates.
• Get a Co-applicant/Guarantor: Apply for a loan with a co-applicant or a guarantor, like a close family member, who has a good credit score. This can improve your eligibility.
• Offer collateral: Some lenders might offer you a loan against some sort of collateral, such as gold, shares, assets, fixed deposits, etc.
• Prove stable income and bank balance: Having a stable income and a good bank balance can assure lenders that you can support the payment of monthly loan instalments.
• Opt for a reduced loan amount: You can request a lower home loan amount, and a higher down payment that poses a lesser risk to the lender.

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:

• Keep track of your credit score to ensure that it is good enough.
• Regularly check your credit report so that you can spot any mistakes and rectify any errors.
• If you have any outstanding or defaulted payments, settle them as soon as you can.
• Remember to pay your credit bills and EMIs on time. If you think you might forget, set up reminders or opt for auto-debit.
• Avoid becoming a loan guarantor. In case the borrower defaults on payments, it will affect your credit score, and you also might end up paying the debt on their behalf.
• Try not to use less than 30% of your credit limit, so that you are not seen as relying on credit.
• Do not apply for many new credit cards, loans, etc., within a short period of time. This includes applying for credit cards, loans, etc.