What You Need to Know About Home Loans, Credit Scores and Your Avocado-Eating Habits

If you're looking to enter the property market, applying for a home loan may seem like a daunting prospect. With plenty of jargon to wrap your head around and many different requirements to meet, it's normal to feel a little overwhelmed. Before you apply for a home loan, learn more about what they are, how to get one and the part your credit score plays in helping your application get approved.

What is a home loan?

Also known as a mortgage, a home loan is a type of loan that is commonly used to purchase property. When you are approved for a home loan, a financial institution advances an agreed amount of money to you, allowing you to purchase a house or an apartment. The property that you purchase is used as security if you are unable to pay off the loan.

Most home loans require regular fortnightly or monthly repayments and have a term of 25 to 30 years. Interest is applied to the sum borrowed, with either a fixed or variable interest rate applied.

How do you get a home loan?

To get a home loan, you'll need to go through an application process. While this process may vary between different financial institutions, it typically involves:

• Gathering and submitting documents, such as proof of income, proof of savings and identification, to gain home loan pre-approval. The pre-approval process will provide you with a realistic idea of how much you could be lent by your chosen financial institution.
• Submitting your home loan application
• A valuation of the property you're thinking about purchasing by your chosen financial institution
• The approval or rejection of your application by your chosen financial institution
• The delivery of a loan offer if your application is successful
• The settlement of the loan and the advancement of funds to you

When applying for most home loans, there are some common requirements that you'll need to meet. They can include having:

• A house deposit of at least 5% of the purchase price
• A good credit history
• Few debts
• A stable form of income
• Proof of your income, including payslips
• Identification, such as a driver's licence or a passport

How can you find the best home loans?

Although most home loans are quite similar in principle, variations in interest rates, term lengths and other features can see you paying more or less in the long run. To find the best home loan for your needs, it's wise to do your research and compare the offerings of each lender.

‍

Features to look out for when comparing different home loans include:

• The interest rate
• The comparison rate (includes interest and fees)
• Average monthly repayments
• The loan term
• Application fees
• Ongoing fees

There are plenty of comparison sites out there that can do some of the hard work for you, so consider consulting them if you're struggling to compare different home loan products on your own.

Is your credit score important when getting a home loan?

There are many different ways that a financial institution may assess your eligibility for a home loan, with your credit score being just one piece of the puzzle. Alongside your income, savings history, monthly living expenses and other factors, your credit score is used to help a financial institution gain a better understanding of your financial history. From here, they can get an idea of how likely you are to be able to afford your repayments in the future.

What credit score do I need for a home loan?

You might wonder what the minimum credit score for a home loan in Australia is, but, unfortunately, there isn't a simple answer to that question. Lenders tend not to publish their credit criteria for home loans and often use different formulas to help calculate eligibility.

As a general rule of thumb, a higher credit score will likely give you a better chance of approval if the other factors considered, such as your savings, borrowing history and job history, are also in your favour.

If you are considering applying for a home loan, the following benchmarks, based on Experian scores, should give you a rough idea of whether your credit score will assist your application:

900 to 1,000

Approval should be quite simple as you are considered to be a quality borrower.

800 to 899

Most lenders should be quite comfortable in considering your home loan application.

700 to 799

If you're considering taking out a home loan with a top tier lender, you may need to save a larger deposit.

699 to 625

Securing a home loan may be more difficult for you and you may require a larger deposit.

Below 625

A very low credit score could mean that you may not qualify for a home loan.

How can you find out what your credit score is?

Finding out your credit score is simple. If you choose to check your credit score with SocietyOne, all you need to do is create a profile and enter some basic information. From there, we'll retrieve your score for you.

Checking your credit score every so often can be a good idea, especially if you're planning on applying for a home loan any time soon. You'll be able to check for irregularities and mistakes that might affect your score if left unchecked.

Once you know what your credit score is, you'll find that there are always opportunities to boost your score. Simple behaviours, such as getting on top of your debts and keeping your credit enquiries to a minimum, can all work in your favour. If your credit score is less than ideal right now, there's always room for improvement.

Tips for building your house deposit

If you're looking to save for a house deposit, some simple saving and budgeting tips can help you boost your bank balance. While you don't necessarily need to cut all the little luxuries out of your day-to-day life (like your daily smashed avocado on toast), reigning in your non-essential spending and sticking to a budget can be helpful.

To help you save some extra money on your way to home ownership, you might want to:

Choose a budgeting method that works for you 

There are plenty of different budgeting methods out there, so don't be afraid to try out a few to see which best suits you.

Take stock of your spending habits

Although it may be a little confronting, analysing where your hard earned money is really being spent can help you find areas of improvement. Take a look at a recent bank statement to find out how much you're spending on clothes, entertainment and other non-essentials.

Define your saving goals

Knowing how much money you'd like to save in a certain period of time can help to stay you on track. Break this figure down into monthly or weekly targets to keep yourself motivated.

Pay off your debts

The sooner you pay off existing debts, the sooner you can focus your energy on saving for a home loan deposit.

Make some simple lifestyle changes

Consider cancelling any unused subscriptions or memberships, take public transport instead of driving, and limit how often you eat out for breakfast, lunch and dinner. These easy lifestyle changes can do wonders for your bank account. 

‍

Keep an eye out for bank accounts with higher interest rates

Transferring your savings into a bank account with higher interest rates can help your money grow faster.