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What credit score do I need to buy a house

Written by

Shaun 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.

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How your credit score affects your home loan

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.

Credit score ExperianEquifaxCredit Simple

Excellent

800-1000

833-1,200

800-1000

Very good

700-799

726-832

700-799

Average

500-699

622-755

625-699

Fair

300-499

510-621

550-624

Low

0-299

0-509

0-549

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.

Excellent Credit Rating Home Loan

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.

How your credit history affects your loan options with Money Matchmaker

Very Good Credit Rating 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.

credit history applicant

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Average Credit Rating Home Loan

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.

credit history

Fair Credit Rating Home Loan

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.

Fair credit report

Low Credit Rating Home Loan

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.

Bad credit home loans

How can you check your score?

You can check your credit score for free and without any impact on your credit score with Money Matchmaker®.

You'll need to create an account with these details:

  • Full legal name
  • Driver Licence number
  • Residential address
  • Date of birth

Your score won't be negatively affected and we protect your data with encryptions.

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Ways to improve your credit score

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:

  • Pay credit card balances strategically
  • Stop applying for credit
  • Meet your loan repayments on time
  • Speak with your bank
  • Schedule your utility payments
  • Don’t use one type of credit

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.

How to improve your credit score

About Money.com.au

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We understand that the world of finance is complex, and offer free, extensive guides on Personal Loans, Car Loans and Business Loans, along with tools like our Budget Planning Spreadsheet to help you better manage and understand personal finance.

About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

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.