How your credit score can impact your Home Loan application

When it comes to a successful home loan application, there are several factors a lender may take into consideration, including your income, savings, job stability and age. Another major factor is your credit history, which is encapsulated in your credit score. Your credit score can have an impact on your chance of approval, interest rate and deposit required.

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Understanding your score is important if you're looking to get a home loan or refinance an existing home loan and wanting to improve your chance of approval, it may even help you negotiate a better rate.

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How is my home loan application assessed?

The loan approval criteria for a mortgage will differ between each home loan lender, however they will most likely take the following into account:

• Your current finances. This includes things like your current income, spending habits, any savings you have and your capacity to repay the loan.
• Your borrowing history. Contrary to popular belief, it's not necessarily a bad thing if you've borrowed a lot. What's more important are your repayment habits. If you can show you've repaid credit consistently and that you'll be able to repay the loan amount, you increase your chances of a successful home loan application.
• Your job history. Lenders will take into account how often you have changed jobs as well as factors like job security and stability.
• Your Savings. Lenders can help you work out how much you can borrow based on the amount you have saved. Based on the types of property you can afford, you can make an informed decision on whether you are ready for a purchase now, or should save more or adjust your expectations.

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What's the minimum credit score needed to get a home loan?

It's difficult to say what with any certainty what minimum credit score is needed to get a home loan in Australia, because most lenders don't publish their credit criteria. As a result, the credit score needed for a home loan can differ depending on who you apply to. Lenders use different formulas to calculate whether you are eligible for a loan. However, as a rough guide, take a look at these benchmarks, based upon an Experian score and then check your own credit score here to find out where you sit.

• Below 625. If your score falls below 625, you might not have a high enough credit score to qualify for a home loan. Most people with a credit rating of less than 625 would likely need to look for an unsecured loan from a second tier lender.
• 625 to 699. You probably have some negative aspects in your credit history, but your current income and financial situation are relatively healthy. Mortgage lenders may see you as being a greater risk, so you could have trouble finding a mortgage with a low interest rate and may be required to have a larger deposit. Finding an unsecured personal loan from a first tier lender may also be more difficult.
• 700 to 799. While you'll likely have no issue securing a personal loan, you may need to save a larger deposit if you are taking out a home loan with one of the 'Big 4' lenders.
• 800-899. You're generally deemed to be creditworthy, meaning that most lenders will be comfortable considering your application.
• 900-1,000. You are considered to be a good quality borrower, making it easier to get approval.

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Can you get a home loan with a poor or average credit score?

So can you qualify for a home loan with bad credit? Just because you might not have a credit score to qualify for a home loan with certain lenders doesn't mean you don't have options. What it probably means is that you're only eligible for specific home loans, which will often have higher interest rates.

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There are lenders in Australia who specialise in home loan products designed for people with less appealing credit scores. If you want a better interest rate than the one you're currently being offered, often all it takes is a few years of saving, spending wisely and consistently repaying on time.

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What are non-conforming home loans?

Non-conforming home loans are among the options available to borrowers with a less than stellar credit history. They are a special kind of loan available to borrowers who don't meet the standard lending criteria set out by major home loan lenders and banks. If things have gone wrong for you in the past with money, non-conforming home loans might be a viable alternative to get things back on track.

The catch is that interest rates are usually higher. This is so that lenders can compensate themselves for the risk they take providing a loan to someone with less than perfect financial history. You might fully intend to pay your home loan, but they don't yet know that.

The good news is that when you consistently meet your loan repayments, you'll be able to improve your credit rating. Down the line, you might be able to refinance to a cheaper home loan.

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Tips for increasing your approval chances

If you don't meet the minimum criteria for a home loan in Australia, there are steps you can take to improve your credit score and rectify your financial situation.

• Put together a financial plan and start saving. Figure out your regular expenses, establish a budget and set a reminder for paying bills. These are the small steps you can take to improve your credit score. 
• Take steps to settle your outstanding debts. If you can show you're capable of paying off outstanding debts, your credit score will improve. 
• Be honest about your history. There's nothing you can hide from a lender so it's good to be open and transparent with them. Show them the steps you've taken to improve and how you plan to make repayments.
• Avoid applying with someone else who has bad credit. You probably won't be able to borrow as much but if your partner has a bad credit score as well, it will probably hurt your chances of approval. 

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What should I do if my home loan application gets denied?

If your home loan application has been denied, it's not the end of the world. There are, however, some things you should and shouldn't do in the meantime:

• Don't apply for another home loan straight away. Your credit score is negatively affected by how frequently and recently you apply for loans, so don't immediately submit another application. Speak to your lenders or brokers to work out a plan. When you are ready you can reapply.
• Do prove that you are financially diligent. You've likely been denied because of a poor credit history. Take a few months to work on your credit score by budgeting, repaying your debts and putting some money aside.