What credit score do you need for a home loan?
A good credit score can boost your changes of getting your home loan approved. Here's everything you need to know.
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To get approved for a mortgage your lender will look at your credit history, so a good credit rating can make a big difference to your loan application. If you're worried about your credit score, check it before submitting a mortgage application. You can check your credit score through finder for free at the link below (and because it's a soft inquiry it won't leave a mark on your credit history).
How will my credit rating affect my home loan application?
Your credit rating gives your lender the information they need to know what kind of borrower you’ll be. If you have a good credit rating you could have access to more home loan options and your home loan interest rates could be lower, saving you hundreds a month on your repayments.
If you have an average credit rating, you could pay higher interest rates and have less home loan options to choose from and if you have a bad rating you may not be able to get approval for a loan at all.
Your credit rating isn’t the only factor a lender will take into account when approving or denying your home loan application, so don’t panic just yet if you’ve got a less-than-ideal record.
What is a credit score?
In Australia, we use something called positive credit reporting, which means your score is calculated based on how often you make payments on time together with how often you are late with your bills. Credit scores generally fall between 0 and 1200, and because of positive credit scoring, it's important to "build your credit" with things like mobile phone plans before you start applying for credit cards and home loans.
A score of between 500 to 700 is generally considered an average score in Australia. When applying for a home loan, you'll want your credit score to be at least average; if you have a below-average credit score, you may have trouble being approved for a home loan from many lenders, because it indicates you're a higher credit risk.
A good credit score is considered to be above 800: if you score in the 800s, you have a better chance of getting a home loan approved.
Anything between 800 and 1200 is considered to be excellent, and you'll be likely to gain home loan approval, provided you meet other loan income and eligibility criteria.
How can I improve my credit rating?
A good place to start is by looking at your credit report and then make sure all the information within it is correct.
It’s a good idea to do this regularly and before making any financial decisions, so that if you apply for a loan there are no nasty surprises. If you don’t check before you apply for a loan and then get denied, you’ll also have this recorded in your credit history, so it pays to be careful.
Another interesting point to consider is whether or not to apply for any new credit products before you approach your lender to ask for a loan. If have no previous credit products on your credit report, taking out a credit card can be a good way to show your lender that you are able to service a debt.
But be careful, it can be easy to get into debt so make sure to pay your balance off in full each month and only apply for a credit card with a low limit. Defaulting on a payment will put you back months in the eyes of the bank. Taking out credit soon before you apply for a loan can also send a negative signal to your lender.
What do I do if my application is rejected?
Your application might be rejected for several reasons, and not always because of our credit history. These include:
- A bad credit history
- A savings history which is not genuine (for example savings which were a gift)
- Employment which hasn’t been continuous or consistent
- An income which won’t be able to service repayments
If your application is rejected you need to work out why. Start by checking your credit score and seeing if there are any obvious way to improve your credit. You should also make sure you're applying for a mortgage you're actually eligible for. If you've saved a 10% deposit then you shouldn't be applying for a loan that requires a 20% deposit.
But if bad credit is the reason your application was reject all may not be lost. There are a number of lenders in the market who offer non-conforming loans and bad credit products, such as Pepper Home Loans. These specialist lenders may be able to help you.
Compare mortgage options for bad credit borrowers
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
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