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When you buy a property or book a property, it is necessary for you to have sufficient funds at your disposal. These liquid assets can be in the form of bank balance or investments in shares or mutual funds. In case you do not have liquidity at the time of buying the property, you should be confident of borrowing the money, either from your friends and relatives or from the credit system. A housing loan is the major source of funding a house purchase in India. Hence, it is essential for you to assess your ability to get a home loan, beforehand. Lenders, on their part, also verify the applicant’s credit history from the credit information bureau (CIB), before disbursing the housing loan. Presently there are four CIBs, authorised to operate in India. CIBIL (Credit Information Bureau of India) was the pioneer CIB and hence, these CIB reports are also referred to as CIBIL reports.
What is a credit report?
The government has enacted the ‘Credit Information Companies (Regulation) Act’, under which four CIBs – CIBIL, Equifax, CRIF High Mark and Experian – have been established. Based on the details provided by the financial institutions, of the credit transactions of their customers, the CIBs maintain records of all the borrowers who have borrowed from the financial system. Data reported by the financial institutions, is collated by the CIBs and made available in the form of a report and a score. Details of all your credit transactions, including credit card transactions, loans and credit enquiries, are reported by these financial institutions and reflected in a single credit report from such bureaus.
Before sanctioning a home loan, the lender will verify your credentials and creditworthiness from the CIBs, to assess the probability of the applicant defaulting on the housing loan. The creditworthiness is assessed from the ‘credit score’ and ‘credit reports’ issued by the CIBs, to minimise the risk of the housing loan becoming bad.
Importance of obtaining a credit report in advance, for home buyers
As the lender will invariably obtain the details of your credit profile from the CIB, it is in your own interest to know in advance, the particulars about you that will be available to the prospective lender. This will help you in finding out whether, prima facie, you will be able to get a home loan or not. For example, people with a CIBIL score of more than 750, have a better chance of getting a home loan than those with a lower score.
Reasons for a home loan getting rejected, based on the credit report
There may be various reasons for your home loan application being rejected by the prospective lender, based on your credit score and credit history. Sometimes, it may be due to defaults in payment of credit cards or in servicing other loans, which affect the credit score. It may also happen due to the adverse transactions of someone else being included under your profile accidentally, because of similarity in the fields like address, name, city, etc.
A bad credit history/score may also be due to carelessness on the part of the financial institutions in reporting your financial transactions or on the part of the CIBs in collating the data received. So, if you become ineligible for a home loan, due to bad credit history or low credit score, your plans to buy a property may go haywire. In such cases, if you have already partly implemented your plan to purchase a house, by either paying token money or advance, you may end up losing the earnest money paid to the seller or the builder. Hence, it is advisable to obtain your credit report in advance, to ensure that there are no erroneous transactions reflecting in your profile. If there are any, you can take corrective actions to get it rectified, before the lender accesses your credit report. As per the RBI mandate, all the CIBs are required to provide the credit score and credit report, free of cost, once in a year.
(The author is a tax and investment expert with 35 years’ experience)