How Is Credit Score for Home Loan Computed

How Is Credit Score for Home Loan Computed

Are you aware that credit score or CIBIL score is one of the crucial parameters, which is factored in while processing your home loan application? You as an applicant must hold a strong score to get a home loan of your preference. No matter whether it is a regular home loan, take over loans, Axis home loan, or SBI home loan for women, lenders of all these loan types require you to hold a good score to approve your home loan application. So, what is a good credit score that can get you home loan approval?

A good score ranges anywhere from 750 to 900, while a poor score is less than 500. 

Credit score  Rating
750 – 900 Excellent
650 – 750 Good
500 – 650  Average
300 – 500 Poor

What’s a credit score?

CIBIL score refers to a score given to businesses and individuals by TransUnion CIBIL, which shows how credible you are as an individual for a credit option like home loan. Financial institutions and banks evaluate whether it is a feasible decision to grant a home loan to a specific individual depending on your score. CIBIL score refers to a numerical value that ranges anywhere from 300 to 900 computed depending on your repayment record, loan history, credit mix, credit inquiries, existing credits, etc. The higher your credit score, the higher your chances of availing a home loan. 

How’s your credit score computed?

For computing your credit score, your entire credit history as an individual is reviewed. This mainly involves the number of loans availed and regularity in repayments of loans along with other linked parameters. Such parameters are evaluated depending on the weightage and your performance as an applicant in each of them. 

Four important parameters for computing the credit score – 

Previous performance –

Previous performance has a 30 per cent weightage on your overall credit score. The past repayment record of credit cards and loans availed by you is factored in and this is looked upon as the most crucial criterion in computing your credit score. 

Visible patterns of irregularity in EMI repayments or credit card outstanding lower your credit score. Bounced or missed loan EMIs and credit card outstanding paid post-due date lead to lower credit scores. It must be noted that missing out on just one loan EMI or delaying credit card outstanding by thirty days does not reduce your credit score. Payments delayed one or two times in a span of two to three years do not considerably impact your credit score. However, the repeated instances of irregular repayments involving missing out on loan EMIs for two to three months back-to-back or delaying the credit card due repayment by sixty to ninety days results in a decrease in your credit score by nearly 100 points. 

Moreover, missing out on more than three loan EMIs or delaying the outstanding card dues by over ninety days results in including recovery agents by financial institutions, which considerably lowers the credit score which may not be rectified easily. 

However, moratorium availed and EMI holidays like the one provided during the COVID do not account for any irregular repayments. 

Credit duration and type –

This holds a 25 per cent weightage on your score computation. This factor has two – parts, firstly it shows whether the credit taken up was unsecured or secured and the overall duration for which the loan was taken up. A secured credit option is a loan availed against any asset. In simpler words, lenders can sell the asset in the case of any loan default. For instance, auto loans, home loans, two-wheeler loans, etc. An unsecured loan is a loan availed without any restriction on end usage, for instance, a credit card, personal loan, etc. It is recommended to strike a balance between unsecured and secured credit options. However, higher unsecured credit even means a lower credit score. 

Moreover, the availability of a steady and clean past credit record for at least twenty-four months makes up the overall credit score. It shows that you as an applicant may be used to avail credit and is familiar with timely repayments. 

Credit exposure – 

Credit exposure accounts for a weightage of 25 per cent on your overall score computation. It is even addressed as credit utilisation ratio (CUR). It is the ratio of overall spending to the overall available credit limit. In simpler terms, credit exposure shows the dependency of an individual on credit for residing in his/her life. 

While credit exposure of 30 per cent is looked upon as ideal, higher exposure to credit is looked upon as negative and makes the credit score fall considerably. 

Other parameters – 

Such factors account for the rest of the 20 per cent weightage. These involve factors like the number of credit cards or loans applied for and current repayment trends and others. A high number of credit cards or loans within a short time period regardless of those sanctioned reduce the score. 

In simple words, even applying repeatedly for multiple loans negatively impacts your credit score. 

What is an ideal credit score?

Credit score ranges anywhere between 300 and 900 wherein 300 is the lowest and 900 is looked upon as the highest. The higher the credit score, the higher is the potential of getting home loan approval. A minimal score of between 700 and 750 is desired by the lenders for sanctioning you the home loan. Distinct lenders might come up with their own set of criteria for a minimum credit score but at least a score of 700 usually is required by most Indian banks and a score of 750 and above is considered ideal for getting approval for a loan without any hesitation from the lender’s end. 

However, a credit score of below 650 can be ameliorated up to a mark acceptable by financial institutions through distinct methods, which involve regularizing credit repayments, repaying outstanding loans in totality and six to twelve waiting before you apply for any fresh loan. 

Also, there might be a few instances of delayed loan repayment owing to genuine and unavoidable circumstances like technical issues while deducting the loan EMI from the bank account delays in getting the credit card dues, etc. which might lower the credit score. Here, in such scenarios, ensure to raise a request to improve your credit.