Getting approved for a home loan is one of the major steps in your home-buying journey. To increase your chances of approval, it helps to understand how lenders view your application and improve on any area that you think might lead to rejection.
Your age, occupation, and income are some essential aspects lenders consider when deciding the fate of your mortgage application. Your credit score is another factor lenders use to determine your suitability as a borrower.
What is a credit score, and why does it matter?
A credit score is a number used by lenders to determine your creditworthiness. It is calculated based on the information on your credit report and is designed to represent your credit risk or how likely you are to repay your debts.
A poor credit score could lead a lender to view you as a high-risk borrower, and they may refuse you a home loan or charge you a higher interest rate. On the other hand, a good credit score indicates your reliability as a borrower, increasing your chances of home loan approval.
What credit score do you need to get a home loan?
There are three major credit reporting bureaus in Australia: Experian, Equifax and illion. All three have slightly different credit score ranges, but the scores provided by each can be broadly divided into five categories – Excellent, very good, good, fair, and poor.
While the exact numbers that fall into each category differ across the three bureaus, your credit score will mostly sit in the same band irrespective of the agency that provides it.
A credit score above 700 is generally considered good, but the higher your score, the better it is for your home loan application. A credit score below 500 is considered poor if you’re checking your Experian or Equifax score, and less than 299 is a poor illion score. A poor credit score could make it challenging for you to qualify for a home loan, or you may find yourself paying a higher interest rate than other borrowers.
While the information above is generalised, you should note that different lenders have different criteria for the minimum credit score they’ll accept for a home loan. There’s no set credit score accepted by every lender to approve a mortgage, and some lenders may be more willing to take a chance and lend to borrowers with an average credit score than others.
If your credit score is not perfect, it could help to speak with a mortgage broker to find out about lenders more likely to approve your loan. But if your score is poor because you can’t keep up with your regular expenses, it could help to revisit your household budget and focus on bringing your finances on track instead of adding another debt to the mix.
Can you get a home loan with a low credit score?
A higher credit score makes it easier for you to get approved for a home loan. If your credit score is 600 or more, your chances of approval are high. While you can still get a home loan with a lower score, you’ll most likely need to apply with a specialist lender dealing with bad credit home loans for high-risk borrowers.
Bad credit home loans work similarly to regular home loans, but you’re charged a much higher interest rate to compensate the lender for their risk. You may also be required to put up a larger deposit or pay for Lenders’ Mortgage Insurance if you take out a bad credit home loan. However, it doesn’t mean that every borrower with a low credit score will get approved for a mortgage. Specialist lenders have varying criteria to judge your application. For instance, they might want to understand why your credit score is low and how your financial situation has changed over time.
If your credit score is low, you may find it helpful to work with a mortgage broker. A broker can help you find a home loan product that suits your needs and suggest lenders that are likely to approve your mortgage application. Applying with a lender directly and having your mortgage application rejected could further hurt your credit score, as all your credit applications are recorded on your credit file.
How can you check your credit score, and what can you do to improve it?
Some credit reporting agencies provide your credit score for free. You can contact any of the three credit reporting agencies to find your credit score or sign up with an online credit score provider to check your credit score for free. You can learn more about your credit score and where to find it on the CreditSmart website.
It’s also a good idea to check your credit report at least once a year, and before applying for a home loan. You can get one credit report for free every three months from each of the three credit reporting bureaus. When you order a copy online, you’ll generally receive it in your mail or email within ten working days.
Once you receive your credit report, it can help you understand some of the information that goes into determining your credit score. You should also check for any mistakes or inaccuracies in your credit report.
While it isn’t common, it’s possible that some incorrect information was reported on your credit account, which could pull your score down. If there’s bad credit on your file due to a mistake, contact the credit provider or get in touch with the concerned credit reporting bureau to correct it. Once your credit report is updated, you can expect your credit score to improve.
If you are not satisfied with your credit score, it may be possible to improve it by consistently practising financially responsible behaviours. Both positive and negative actions contribute to your credit score, and positive financial behaviours can eventually help counteract some of the past adverse events. So remember to pay all your bills on time, try to reduce your outstanding debts and avoid making multiple credit applications too close to each other.
