Written byShaun McGowan
Will your credit score help or hinder you when it comes to buying a house? And what do those credit score labels even mean? What is fair, average or excellent when it comes to taking out a home loan? Before you consider applying for a home loan, find out how your credit score is actually viewed by lenders.
Credit scores are split into five ranges, from low to excellent. Each of the three main credit rating agencies in Australia uses slightly different ranges for credit scores.
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When it comes to a major financial decision like buying a house, your credit score is more important than ever.
In Australia, different lenders have different standards for a credit score when buying a house, so while there isn’t a ‘single’ score required to get a home loan, understanding how your credit score might be interpreted by a lender can ensure you know you’re getting the best home loan on offer.
Getting a home loan with an excellent credit rating is the best position to be in. For such a massive purchase and major investment in your own life, this is the best place to be if you want to get the lowest rates and secure a competitive mortgage.
Luckily, with an excellent credit rating, lenders will generally give you full access to credit, allowing you to borrow more for your home loan and dictate the terms that suit you best. However, it’s important to remember that a credit score isn’t a guarantee, it’s simply an indication of your trustworthiness that you’ll need to reinforce with supporting documentation.
You may even be able to ask for discounted fees or negotiate better interest rates with your current lender - so if you’re even close to getting up to the excellent credit score tier, make it a priority before you apply for a home loan.
A very good credit rating home loan is what most of us have when applying for a home loan. Generally, this is because at the point you’re ready to buy a house, you’ll have made a number of other financial decisions, and you’ll be ready to apply for this significant type of loan.
In the best scenario, your credit rating will also be on the way up, which means that, provided you are able to make repayments, you should be able to secure a home loan easily with a very good credit score and have better options down the line if you choose to refinance.
You may not get rates as good as those with an excellent credit score, but you’ll still get great access to a wide number of home loan options and individual lenders. It’s likely that you’ll be applying with your bank, so be sure to use the existing relationship you have with them to illustrate your trustworthiness.
A very good credit rating home loan is by no means bad - the difference between excellent and very good credit home loans will be minimal, but that doesn’t mean you can’t improve your credit score before applying to ensure you get a better deal than is currently available.
A score between 500 to 700 is considered average in Australia. While someone with a below-average credit score may struggle to be approved for a home loan from many lenders, some smaller specialist lenders may be willing to take a chance on them.
If you have the option, it’s always worth taking the time to improve your credit score at this stage. This might be particularly relevant with home loans more than any other type of loan, as the level of risk in your application can be influenced by the uncertainty of a fluctuating property market.
For example, if you’re applying for a home loan with an average credit rating in an area where houses are relatively cheap and consistently on the rise, there’s more chance of you getting approval than in a high-density, high-cost area with dipping property prices.
Why is this the case? In short, the more likely your property is to increase in value, the more available equity you will have in the property as a result. With a mortgage, your house is the collateral, the security on the loan. If the security increases in value, the less risky the lender feels about the remaining, outstanding balance on the mortgage.
A fair credit score may affect your ability to secure finance. We’re not quite yet at the lowest rating for a home loan (and there’s still good news!) but a fair credit rating home loan is definitely not the best offer you’ll get.
Lenders may offer you higher interest rates and look very closely at your finances to ensure you have the ability to make repayments. At this level, you’ll need to put much more attention to your application and supporting documents.
The very last thing you want here is to have made progress in improving your credit score and to find yourself knocked back by a hard credit check and a declined application, especially if doing so would prevent you from achieving one of your biggest dreams of buying your own house.
Just as with an average credit rating, the area you choose to buy in plays a part here, and you may find the areas you’re approved to buy in more restrictive than if you had a higher credit rating.
A low credit rating home loan is not the greatest option, to put it lightly.
It’s very unlikely that banks will lend you the money for a mortgage, which will then require you to seek out smaller, independent lenders who can essentially dictate their terms on how they will lend you money, these lenders specialise in bad credit home loans.
A low credit rating home loan application might be the result of a bankruptcy, defaults or other serious negative events in your credit history, and lenders will be very hesitant to approve a large amount of money if you’re unable to provide other supporting documents, collateral, or guarantors.
If you’re considering a low credit rating home loan application, make sure you seek out financial advice from a trusted, independent expert first.
They can not only help you complete your application and advise on how to best present yourself to gain approval, but they may also help you find ways to improve your credit score before applying.
Financial advice can also ensure you understand exactly what you’re applying for; lenders that offer bad credit home loans will be very particular about the amount of interest you pay, the fees they attach knowing you have no other options, and the terms that will keep you in your mortgage for a long time.
It’s possible to find a good home loan if you have a low credit rating, but even a fair credit rating home loan will be significantly better than your options at this stage.
You can check your credit score for free and without any impact on your credit score with Money Matchmaker®.
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If you find yourself with a below-average score, never fear, there are ways to improve it. Things to do to get your number higher are:
To avoid your credit score dropping you should try to avoid negative financial events like late payments and defaults.
A key to a good credit score is to monitor what is going on and report any problems when you see them. You can do this with the help of Money Matchmaker® for free.
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Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.