If you’re thinking about buying a house, it’s likely that you plan to take out a home loan and want to know about the factors that could affect your eligibility for one. Understanding the home loan eligibility criteria can make it easier to assess your available options and reduce the chances of rejection.
Generally speaking, lenders are concerned about two things when assessing your home loan application – one, whether you can comfortably repay the loan, and two, how much of a risk you pose as a borrower. For this purpose, lenders will ask you for your pay slips and bank statements to verify your income and check whether you can afford your lifestyle while paying off a mortgage. Additionally, they will check your credit score to assess your creditworthiness or how likely you are to default on your loan based on your credit history.
What is a credit score, and why does it matter?
Your credit score is an indicator of your creditworthiness. You can think of it as a score card representing your financial behaviour, based on a record of your credit history maintained by the three credit bureaus – Experian, Equifax, and Illion.
Lenders usually check your credit score to find out how likely you’re to repay the loan, and your score could impact the size of your loan, the interest rate you pay on it, and whether you’ll qualify for a loan at all. Typically, the higher your credit score, the better you appear in the eyes of lenders. On the other hand, the lower your credit score, the higher the financial risk you pose to lenders.
What is a good credit score for a home loan?
Credit score numbers range from 0-1200, depending on the credit reporting agency. This difference is due to credit agencies’ slightly different parameters for calculating your credit scores. However, all three agencies divide their credit scores into five bands that reflect the financial risk you pose to a lender. The five commonly used tiers are: excellent, very good, good, fair or average, and poor or below average. Interestingly, despite the difference in your numeric credit score across the three agencies, you’ll find that your credit score usually sits in the same tier across the three.
| Credit score tiers | Equifax | Experian | Illion |
| Excellent | 853-1200 | 800-1000 | 800-1000 |
| Very good | 735-852 | 700-799 | 700-799 |
| Good | 661-734 | 625-699 | 500-699 |
| Fair/average | 460-660 | 550-624 | 300-499 |
| Poor/ below average | 0-459 | 0-549 | 1-299 |
Source: Equifax, Experian, illion
*[Note that illion uses slightly different terms for the various tiers, but we have used common terminology for simplicity.]
Coming to the question of a good credit score, you can answer it by looking at the numeric range of the respective tier in the table above. But whether having a ‘good’ credit score is good enough to qualify for a home loan cannot be said with certainty.
Even though the credit score is an important criterion used by lenders to evaluate your mortgage application, most lenders don’t share their lending criteria publicly. You’ll unlikely find a lender advertising the minimum credit score they’ll consider for a home loan. Additionally, lenders use factors other than your credit score when evaluating your mortgage application, making it challenging to come up with a fixed number to help you qualify for a home loan. However, understanding the credit score tiers can give you an indication of how likely you are to qualify for a loan.
For instance, if your credit score is excellent or very good, lenders are likely to consider you a low-risk borrower, and you might find it easy to get approved for a home loan.
If you fall in the next tier, which is still a ‘good’ credit score, you have a better chance of getting approved than someone with a fair or poor score. However, you may not be eligible for the same low-interest rate offers or discounts available to individuals with higher credit scores. While it’s not a benchmark, it may not be incorrect to say that a credit score of 700+ could make it easier for you to qualify for a home loan.
If your credit score falls in the category of fair or average, you may need to work on repairing your credit before applying for a home loan. However, this is not to say you cannot get a home loan with an average or low credit score. Lenders use other factors besides your credit score to evaluate your ability to repay the loan. A fair credit score can still get you mortgage approval, depending on your income and overall financial situation.
Things could get tricky if your score is below average or poor, as this could be a result of adverse financial events or irresponsible financial behaviour in the past. If your poor credit score is a result of past mistakes (such as defaulting on a loan in the past), you may want to discuss your situation with a mortgage broker, as traditional lenders are less likely to approve your mortgage. Instead, your broker may suggest applying with a specialist lender who deals with high-risk borrowers with bad credit to increase your chances of approval. However, make sure to check your budget and ability to repay the loan before you take on new credit.
If you’ve had financial issues in the past, you should avoid falling into the same trap again, and only take on new credit if you’re confident about your ability to repay it. A mortgage broker could help you evaluate your finances and guide you to the right mortgage product for your situation.
You should also check your credit score from time to time (it won’t affect your credit score adversely) and order a copy of your credit report at least once annually, and before applying for a home loan, to be sure of your situation.
