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How To Get A Home Loan With Low CIBIL or Credit Score

16-Jan-2024 | Home Loan

How To Get A Home Loan With Low CIBIL or Credit Score

Securing a home loan is a significant financial milestone, but for individuals with a less-than-ideal credit history, the journey may seem daunting. A Credit Information Bureau India Limited (CIBIL) or credit score plays a pivotal role in determining one's creditworthiness, and a low score can often be a roadblock in obtaining favorable loan terms. 

However, all hope is not lost for those with low CIBIL scores. With strategic planning and proactive measures, it is possible to navigate the complexities of the lending landscape and secure a home loan even when facing credit challenges. In this guide, we will explore effective strategies on how to improve your chances of obtaining a home loan with a low CIBIL or credit score, empowering aspiring homeowners to turn their dreams of owning a house into a tangible reality.

How to get a home loan when you have a low CIBIL Score?

Getting a home loan with a low CIBIL (Credit Information Bureau India Limited) score can be challenging, you can check credit score online, as lenders often use your credit score to assess your creditworthiness. However, there are some steps you can take to improve your chances:

Check Your Credit Report:

  • Obtain a copy of your credit report from credit bureaus like CIBIL, Experian, or Equifax. Review it thoroughly to understand the factors contributing to your low score. Correct any errors on the report, if any.

Identify the Reasons for a Low Score:

  • Understand the factors affecting your credit score, such as late payments, defaults, or high credit utilization. Addressing the root causes is crucial for improving your score.

Clear Outstanding Dues:

  • Pay off any outstanding debts or dues. Timely payments can have a positive impact on your credit score over time.

Negotiate with Lenders:

  • If you have existing loans or debts, consider negotiating with lenders for a settlement or restructuring of your repayment terms. This may help you manage your debts more effectively.

Apply for a Secured Loan:

  • If your credit score is very low, consider applying for a secured loan where you provide collateral, such as property to secure the loan. This reduces the risk for the lender, making approval more likely.

Add a Co-Applicant or Guarantor:

  • Adding a co-applicant with a higher credit score or a guarantor can strengthen your loan application. The co-applicant's or guarantor's creditworthiness may compensate for your low score.

Choose a Longer Loan Tenure:

  • Opting for a longer loan tenure may reduce your monthly EMI, making it more manageable. However, keep in mind that a longer tenure may result in higher overall interest payments.

Demonstrate Stable Income:

  • Lenders may be more willing to approve a loan if you can demonstrate a stable and sufficient income. Provide proof of income through salary slips, income tax returns, or other relevant documents.

Remember that improving your credit score takes time, and it's essential to demonstrate responsible financial behaviour.

What is a CIBIL Score?

A CIBIL score, officially known as a Credit Information Bureau India Limited (CIBIL) score, is a numerical representation of an individual's creditworthiness. It is a three-digit number ranging from 300 to 900, with higher scores indicating a more favorable credit history. This score is a crucial factor considered by lenders when evaluating a person's eligibility for loans or credit cards.

The CIBIL score is based on an individual's credit report, which is a detailed record of their credit-related activities. The score is calculated by taking into account various factors, including:

  1. Credit Payment History: This is the record of your credit payments, including any delays or defaults. Timely payments contribute positively to your score.

  2. Credit Utilisation: The ratio of your credit card balances to your credit limits is considered. Higher credit utilisation may negatively impact your score.

  3. Length of Credit History: The duration of your credit accounts and the time since your last credit transaction are taken into account. A longer credit history can positively influence your score.

  4. Types of Credit: Having a mix of different types of credit, such as credit cards, instalment loans, and mortgages, can be beneficial for your score.

  5. New Credit: Opening multiple new credit accounts within a short period may negatively affect your score.

The CIBIL score serves as a quick and standardized way for lenders to assess the risk associated with lending money to an individual. A higher score suggests a lower credit risk, making it more likely for the person to receive favorable loan terms, such as lower interest rates. On the other hand, a lower score may result in higher interest rates or even rejection of credit applications.

Regularly checking and understanding your CIBIL score is essential for maintaining good financial health and addressing any issues that may impact your creditworthiness. Individuals can access their credit reports and scores from credit bureaus like CIBIL to stay informed about their credit status and take steps to improve it if necessary.

How does CIBIL Score work?

The CIBIL score, or Credit Information Bureau India Limited score, is a numerical representation of an individual's creditworthiness. It is calculated based on various factors from the person's credit history, and the score ranges from 300 to 900. Understanding how the CIBIL score works involves considering the key components that influence its calculation:

  1. Credit Payment History: The most significant factor in determining your CIBIL score is your credit payment history. This includes how regularly you make your credit card payments and repay loans. Timely payments have a positive impact, while late payments, defaults, or bankruptcies can lower your score.

  2. Credit Utilization: This factor assesses the ratio of your credit card balances to your credit limits. High credit utilization, or using a significant portion of your available credit, can negatively affect your score.

  3. Length of Credit History: The duration for which you have been using credit is considered. A longer credit history can positively impact your score, as it provides a more extensive record of your credit behavior.

  4. Types of Credit in Use: Lenders prefer to see a mix of credit types, such as credit cards, instalment loans, and mortgages. A diverse credit portfolio can positively influence your score.

  5. New Credit: Opening multiple new credit accounts in a short period can be viewed as a risk factor. The number of recently opened accounts and the number of recent credit inquiries impact this portion of the score.

The CIBIL score is calculated using a sophisticated algorithm that weighs these factors to provide a comprehensive assessment of an individual's creditworthiness. The goal is to predict the likelihood of the person defaulting on credit payments in the future.

To maintain or improve your CIBIL score, it's essential to make timely payments, manage your credit responsibly, avoid excessive credit utilisation, and maintain a diverse mix of credit types. Regularly monitoring your credit report and addressing any discrepancies or issues promptly can also contribute to a healthy credit profile. A higher CIBIL score increases your chances of obtaining credit at favourable terms from lenders.

How Low is a "Low CIBIL Score"?

In the context of credit scores in India, a CIBIL score is a numerical representation of an individual's creditworthiness. The Credit Information Bureau (India) Limited, or CIBIL, is one of the credit bureaus in India that calculates these scores based on an individual's credit history, repayment behaviour, and other financial activities.

A CIBIL score typically ranges from 300 to 900, with a higher score indicating better creditworthiness. The classification of a "low CIBIL score" can vary among lenders, but generally, a score below 650 is considered low. A low credit score suggests a higher risk for lenders, as it may indicate a history of late payments, defaults, or other financial challenges.

It's important to note that different lenders may have different criteria for evaluating credit scores, and what is considered a "low" score may vary. A low CIBIL score can impact an individual's ability to obtain loans or credit cards, and even if approved, it might result in higher interest rates or less favourable terms. It's advisable for individuals to regularly check their credit scores and take steps to improve them if necessary, such as by paying bills on time and managing credit responsibly.

How to Get a Home Loan with Low CIBIL Score

Getting a home loan with a low Credit Information Bureau India Limited (CIBIL) score can be challenging, but there are strategies you can consider to improve your chances:

Increase Your CIBIL Score:

Improving your credit score over time is crucial for better loan terms. Here are some steps to boost your CIBIL score:

Check and Correct Your Credit Report:

  • Obtain your credit report and review it for inaccuracies. Dispute any errors to ensure your credit report accurately reflects your financial history.

Pay Your Bills on Time:

  • Timely payments of your existing debts, including credit cards and other loans, can positively impact your credit score. Set up reminders or automatic payments to avoid missing due dates.

Reduce Outstanding Debt:

  • Work on reducing your outstanding debt. Pay off high-interest debts first and focus on keeping credit card balances low.

Limit New Credit Applications:

  • Avoid applying for multiple loans or credit cards within a short period. Each credit inquiry can have a temporary negative impact on your score.

Diversify Your Credit Mix:

  • Having a mix of credit types, such as credit cards, instalment loans, and retail accounts, can be beneficial for your credit score. However, only open new credit accounts when necessary.

Seek Professional Advice:

  • Consult with a financial advisor or credit counselling service for personalised guidance on improving your credit score.

Approach HFC/NBFC for Home Loan:

Housing Finance Companies (HFC) / Non-Banking Financial Companies (NBFCs) may be more lenient in their credit score requirements compared to traditional banks. HFCs/NBFCs often consider other factors such as income stability and the property's value. However, be prepared for higher interest rates in such cases.

Include a Co-Applicant with Good CIBIL Score:

Adding a co-applicant with a higher CIBIL score, such as a family member or spouse, can increase your overall creditworthiness. The co-applicant's strong credit history may help offset your lower score, making it more likely for the lender to approve the loan.

Remember that improving your credit score takes time, so it's essential to be patient and consistent in your efforts. 

How to Increase CIBIL Score

Improving your CIBIL score involves adopting responsible financial habits and managing your credit responsibly. Here are some steps you can take to increase your CIBIL score:

Check your Credit Report:

  • Obtain a copy of your credit report from credit bureaus like TransUnion CIBIL, CRIF, Experian and Equifax. Review it for any errors or discrepancies, such as incorrect personal information or accounts that don't belong to you.

Timely Payments:

  • Ensure that you pay all your bills, including credit card payments, EMIs, and loan instalments, on time. Late payments can have a significant negative impact on your credit score.

Reduce Credit Card Balances:

  • Try to keep your credit card balances low, ideally below 30% of your credit limit. High credit card utilisation can negatively affect your credit score.

Avoid Multiple Loan Applications:

  • Making multiple loan or credit card applications within a short period can make you appear credit-hungry to lenders and can impact your score negatively. Only apply for credit when necessary.

Diversify Credit Mix:

  • A healthy mix of credit types, such as credit cards, instalment loans, and retail accounts, can positively impact your credit score. However, only take on credit that you can manage responsibly.

Don't Close Old Accounts:

  • Closing old credit accounts can reduce your overall credit history, which may negatively impact your score. Keep older accounts open, even if you don't use them frequently.

Settle Outstanding Dues:

  • If you have any outstanding dues or settled accounts, work on clearing them. Settling accounts does not remove the negative impact on your credit score, but it is better than leaving them unpaid.

Regularly Monitor Your Credit Report:

  • Periodically check your credit report to ensure all information is accurate. Monitoring your report helps you identify and rectify any discrepancies promptly.

Be Patient:

  • Improving your credit score takes time. Be patient and consistent in practising good financial habits. As you demonstrate responsible credit behaviour over time, your credit score should gradually improve.

Remember that there is no quick fix for a low credit score, and genuine improvement comes from responsible financial behaviour over time. Regularly monitoring your credit score and practising good financial habits are key to maintaining a healthy credit profile.

Other Factors Considered by HFCs / NBFCs When Providing a Home Loan

When HFCs/NBFCs evaluate a borrower's eligibility for a home loan, they consider various factors beyond just the credit score. Here are some key factors that lenders typically take into account:

Income and Employment Stability:

  • Lenders assess your income to determine your repayment capacity. Stable employment and a consistent income history can positively impact your eligibility.

Debt-to-Income Ratio (DTI):

  • The DTI ratio is the percentage of your gross monthly income that goes toward paying debts. Lenders prefer borrowers with a lower DTI as it indicates a healthier financial situation.

Loan-to-Value Ratio (LTV):

  • The LTV ratio is the ratio of the loan amount to the appraised value of the property. A lower LTV ratio is generally more favourable to lenders, as it signifies a lower risk.

Down Payment:

  • The amount of down payment you can make can influence the lender's decision. A higher down payment often indicates financial stability and reduces the risk for the lender.

Credit History:

  • While your credit score is a significant factor, lenders also look at the details of your credit history, including the types of credit you have, the length of your credit history, and any negative marks such as late payments or bankruptcies.

Property Appraisal:

  • Lenders assess the value of the property you intend to purchase through a professional appraisal. The property's value is crucial in determining the loan amount and terms.

Loan Tenure:

  • The duration of the loan can impact the interest rate and the overall risk for the lender. Shorter loan tenures may have lower interest rates, but monthly payments can be higher.

Nature of Employment:

  • The stability and nature of your employment can affect your loan approval. Permanent employment is generally viewed more favourably than contractual or temporary employment.

Co-Borrower or Guarantor:

  • Having a co-borrower or guarantor with a strong financial profile can enhance your loan eligibility. It provides additional assurance to the lender.

Financial Reserves:

  • Lenders may consider the presence of financial reserves, fixed deposits or savings as a sign of financial responsibility. Having savings can help in case of unexpected financial challenges.

Other Monthly Obligations:

  • Apart from existing debts, lenders may consider other monthly obligations such as alimony or child support when evaluating your repayment capacity.

Legal and Technical Due Diligence:

  • Lenders conduct legal and technical checks on the property to ensure there are no legal disputes or technical issues that could affect the property value or ownership.

It's essential to be prepared and present a strong financial profile when applying for a home loan. Understanding these factors and working to strengthen your overall financial health can improve your chances of getting approved for a home loan on favourable terms.

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