How to Apply for a Home Loan with Low CIBIL Score

Dreaming of owning a home is something we all dream of, but if your CIBIL or credit score is less than average, that dream might feel a bit out of reach. A low credit score can seem like the home loan approval process an uphill battle, with banks scrutinising your loan application with a discerning eye. However, in today's financial landscape, you may still get a  Home Loan with a low CIBIL or credit score provided you're taking the right steps to improve your financial health. 

In this blog, we will walk you through some smart, practical steps that can help you overcome the hurdle of low CIBIL score and move one step close to owning your dream home.

What is a Credit Score?

A credit score is a three-digit number ranging from 300 to 900 that summarises your creditworthiness. The score is provided by credit bureaus like CIBIL and Experian based on your credit history. 

Now, what's credit history? In simple words, credit history refers to a record of your past borrowing and repayment activities and includes details about your credit cards and loans. It tracks how responsibly you have handled debt, including whether you have made payments on time or have defaulted on loans. A higher score indicates a lower risk for lenders, making it easier to secure loans and credit at favorable terms.

Importance of Credit Score

A good credit score is required for various reasons as listed below:

• Loan Approval: Banks and financial institutions use credit scores to gauge the risk of lending money. A good score, preferably above 750, tends to improve the chances of loan approval. 
   
• Interest Rates: Individuals with higher scores typically qualify for lower or preferential interest rates. 
   
• Loan Amounts: A strong credit profile can lead to higher loan amounts being approved. Even in some situations, banks may offer pre-approved loans provided you have an excellent CIBIL score. 
   
• Faster Approvals: Good credit scores often result in quicker processing times for loan applications.

In India, the following ranges generally define good and bad credit scores:

• 750-900: Excellent 
   
• 700-749: Good 
   
• 650-699: Fair 
   
• 550-649: Poor 
   
• Below 550: Very Poor

Steps to Get Home Loan With Low CIBIL Score

A CIBIL score varies between 300 and 900, with scores below 650 perceived to be low. A low score indicates past credit management issues, making it challenging to secure a home loan. Let's study some steps that you can take to successfully navigate the loan process:

1. Increase Your Down Payment: A bigger down payment lowers the loan amount and reduces lending risk for the bank. This helps improve your chances of a loan approval.
2. Improve Your Debt-to-Income Ratio: Banks assess your repayment capacity by comparing your monthly debt payments to your income. Cutting your existing debts or boosting your income can make you a more attractive borrower.
3. Include a Co-Applicant: Applying with someone who has a higher CIBIL score and strong financial standing can strengthen your loan application. This shared responsibility reduces the lender's risk and may lead to better loan terms.
4. Consider a Guarantor: A guarantor agrees to repay the loan if you default, providing additional security for the lender and potentially increasing your chances of approval.
5. Maintain a Clean Credit History: Ensure timely payments on all bills and existing loans to avoid further damage to your credit score. Frequently, check your credit report and if there are errors report them.  
6. Build Relationships with Lenders: If you have an existing relationship with a bank or financial institution, leverage this to improve your chances of getting approved despite a low score.
7. Consider Loan Tenure and Amount: Opting for a longer loan tenure can lower your monthly EMI, making it more manageable, though it may increase the total interest paid overtime.

Common Reasons for a Low CIBIL Score

Here are some of the reasons for low credit score:

• Missed or late payments on credit cards or loans
• Defaulting on loans
• High credit utilisation ratio
• Too many hard/credit enquiries in a short span of time

How to Improve Your Credit Score and Loan Eligibility? 

Let's be honest - it's difficult to secure a home loan with poor credit score. But don't worry, there are ways to improve it. Start by paying your bills on time, reducing your outstanding debt, and maintaining a healthy credit utilisation ratio (the percentage of available credit you're currently using). 

For example, if you have a credit card limit of ₹1 lakh, try to keep your monthly utilisation to ₹20,000 to ₹25,000. Additionally, regularly checking your credit report for errors or discrepancies can help you identify issues affecting your score and rectify them promptly.