My nephew who wanted to take a home loan and whom I had advised to obtain his CIBIL report, called me to express his shock when he found 0 credit score in his CIBIL report. He was worried that with 0 score, which he perceived to be negative rating, he would not be able to get home loan.  The article is the result of the discussion which I had with him.

What is CIBIL Score and its range

CIBIL is the pioneer credit information bureau and thus the word “CIBIL” has become synonym with credit history and credit bureau.  A credit information bureau maintains history of credit transaction of the borrowers’ base on data supplied to them by financial institutions. A CIBIL score is a numerical value ranging between 300 to 900 which is arrived on the basis of your transactions with the financial institutions. Higher the number, higher is your probability to get a loan or credit and that too at better terms.  However in case you have never availed any credit card or loan in the past, your credit score would be 0. It may also be -1 in case your credit history available with the credit bureau is for less than 6 months. For new borrower the CIBIL assigns score between 1 and 5. Lower the score, higher the risk of lending you from the lender’s perspective.

Why CIBIL score is important

Before extending any credit facility, the lender wants to satisfy itself that the borrower will repay the money in due course.  As the saying goes, history repeats itself and which equally applies to Individual behaviour also . With the advent of credit information bureau which keep history of the borrowers, based on their credit behaviour in the past, the lenders are in a better position to assess the likelihood of the borrower defaulting in servicing of the loan. The credit score is produced by software with the help of various parameters of the borrowers. Lenders are comfortable with lending to a person who has credit score of more than 750.

Home Loan

Can a person with no credit history get a home loan?

This is a chicken and egg problem. How can one create a credit history unless he gets to use some credit from the system and how can the system lend to a person who does not have any history to provide the lender, a satisfaction of the intention of the borrower to repay the loan. Though the credit score is the starting point for lenders to consider the borrower, primarily, for lending but this is not the only criteria applied by the lender to grant loans.  So in case you do not have any credit history, you can still get home loan from lenders but you may have to provide more documents to the lender for it to arrive at the satisfaction needed about your ability and intention to service the EMIs regularly.

How the lenders determine the ability and intention of the borrower

The credit information bureaus have come into existence only after 2005 but the banks have been lending for ages.  So in case the borrower does not have any credit history, a person can still get a loan and in such a situation the lenders use the old yardsticks to determine eligibility of a borrower to get a home loan.

Your educational qualification and job profile are most important criteria used by the lender in such situations. So for example if you are a qualified doctor or a chartered account and which ensures you regular income, the lender may get comfort associated with such qualifications. Likewise one who is employed in higher position in government like say afresh IAS or IPS, he  in all likelihood will get the home loan even if he does not have past history.

Even if you are not so lucky to be working with government or have high educational qualification, you still have chances of getting a home loan. In such cases the lenders will ask you for your bank statements of past few years to decipher your attitude towards money. If there are regular debit for investments like systematic Investment plans etc., this may give the lender comforts to the lender about your saving habits.  The banks may scrutinise your banking transactions in details also to understand regularity with which you pay your utility bill like electrify or   mobile bills. They may also verify the regularity of payment of your rents in case you are staying in rented places. Your spending and saving habits are also ascertained from your bank statements so that the behaviour can be extrapolated for servicing of the home loan as well. The lenders may also ask the borrower to furnish guarantee from a person who has credit history with good credit score. These are some proxy parameters used in absence of regular credit reports.

The parameters discussed above are not exhaustive and each bank may have different internal parameters in order to lend a person who does not have any credit history. Since you do not have any credit history, you may not be able to get best rates for the home loans which are otherwise available to persons with excellent credit score.

The writer is a tax and investments expert and working as Chief Editor of ApnaPaisa. He can be reached at [email protected]

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September 2021