How important is credit score in loan applications for houses

Banks and other financial institutions use different criteria to determine if you are in a stable financial position to secure a home loan – including your income, employment history, age, and savings. Higher credit scores and good credit ratings can increase your chances of being approved for your loan.

These are the top facts about credit and how it affects your ability to obtain a mortgage for your home.

What is a credit score?

Credit scores, also called credit ratings, are numbers that show your creditworthiness and reliability when borrowing money. Your score can be used by lenders to evaluate your credit health. It informs lenders about how well you manage your finances and whether you are able to afford monthly payments.

Three major credit reporting agencies are available in Australia. Each agency has its own range of credit scores, which is typically between zero to 1,200. Experian and Equifax are these agencies. The table below sums up each provider’s score ranges, along with the chances of qualifying for a home loan.

 Sources: Equifax, Experian, Illion

Excellent 
To be approved for a loan, your score must fall within the range. You have very little chance of defaulting in the next 12 month. You may be offered additional loan options by some lenders.

Very Good
Your creditworthiness as a borrower is high – so are your chances of securing a home loan.

Good
Your credit score remains high and you aren’t at risk of defaulting on your mortgage within the next twelve months. There are good chances that your mortgage will be approved.

Fair
Your credit score must be within the range to avoid defaulting on your loan. Lenders will evaluate your financial situation before approving your loan.

Below the Average
Your chances of getting approved for a loan are lower if you have a poor credit rating. Although there are still lenders that will approve you for a loan to purchase your home, interest rates will be higher.

How does your credit score get calculated?

Credit scores are an indicator of credit health and can be influenced by many factors. These factors include:

• How many times have you applied for a loan or credit?
• The type of loan that you are applying for and the amount.
• Your payment history
• How many times you have defaulted on a debt
• Any court writs, default judgments

What is your best credit score to get a loan for your home?

It’s always best to target a high credit rating because your score plays a crucial role in helping lenders determine how much you can borrow and the interest rates they will give you. Borrowers with high credit scores might be eligible to receive attractive loan options like lower interest rates and higher credit card limits.

Even if your credit score is not perfect, you can still be eligible for a loan on your house.

Bad credit or poor credit scores could mean that your homeownership dreams are ruined. Specialist lenders are available to assist you in getting a home loan. These lenders are also known as non-conforming lenders and high-risk borrowers. They can provide home loans to borrowers with low credit scores or high-risk borrowers. These loans are more risky than other types of loans and have higher interest rates.

If you have poor credit, a mortgage broker can help you find a lender that is right for you. If you apply directly to the lender or bank, your credit score will be lower. Your credit report will record every application. 

How can you improve your credit scores?

Credit score building takes a lot of planning and self-assessment. These are some easy ways to improve your credit score.

• Be mindful of your daily expenses
• Make sure you are punctual in your payments
• Apply for as few credit cards as possible.
• Reduce your credit card limit
• Verify the accuracy and completeness of credit files in order to be certain they are correct.
• Spend less discretionarily
• You should set aside money for savings.