What credit score is required to get a home loan?

• If you’re thinking about buying a house, you should pay attention to your credit score.
• Learn how your credit score can affect your chances of getting a home loan.
• Find out the minimum score you need to get a home loan.

“I’m thinking about buying a house and want to know if my credit score will affect my chances of getting a loan. How can I know what credit score I need to get a home loan, and what my options are if I have a bad credit score?”

These are the questions asked by many of our readers who are trying to get onto the property ladder. Here are the answers.

Why your credit score matters

Lenders make decisions on whether they will lend you money based on a number of factors, including your age, income, occupation and credit score.

Your credit score is a key factor and is important because it gives lenders a guide as to how much of a risk to them you might be.

A poor credit score means a lender may view you as a bad risk and refuse you a loan.

However a good credit score shows you are trustworthy when it comes to repaying debt and you will have a much better chance of getting the loan. As well, a good credit score means you are more likely to be offered a lower interest rate on your loan.

Crunching the credit score numbers

Your credit score can range from 0-1000, and is graded in bands.

Credit reporting agency Experian grades credit scores on the following scale:

Excellent: 800-1,000

Your financial situation is in good order and you have shown that you are a good credit risk.

With an excellent credit rating, you are much more likely to be approved for a loan and a more favourable interest rate.

Very good: 700-799

Most lenders should look favourably on your application.

Good: 625-699

Another favourable score range. However, Australia’s Big Four banks (Commonwealth, Westpcac, NAB and ANZ) may require a larger deposit when you are seeking a loan with this credit rating.

Fair: 550-624

We are starting to move into territory where lenders may see you as a greater risk and may seek a larger deposit when you apply for a loan.

Below average: 0-549

You may struggle to qualify for a home loan if your credit score is in this range.

You may need to look for what is known as a non-conforming loan. (More on that below.)

Common problems that can affect your credit score

There are a number of issues that can put a dent in your credit score, including:

Recent missed payments or defaults

Lenders want to see if you have a history of paying your debts on time, and missed payments or defaults will negatively impact your credit score.

Ex-bankrupt

If you have been declared bankrupt, you are free to apply for credit once your bankruptcy ends. However, your bankruptcy will remain on your credit report for two years from when your bankruptcy ends, or five years from the date you were declared bankrupt. Your ability to get a loan could be affected until you can start to rebuild your credit score.

No credit score because of recent immigration

If you are a new arrival in the country or have been using an overseas credit card while in Australia, you won’t have had the chance to build up a good credit score. A good way to start building a good credit history in this country is to get an Australian credit card and start using it responsibly.

Home loan pre-approval

If you’re not sure if your credit score will be enough to get a home loan, you could try loan pre-approval.

Pre-approval occurs when your lender gives you an indication they may be willing to lend you a specified amount. The full pre-approval process involves a credit check.

Non-conforming loans as an option

If your credit score is in the 0-549, ‘Below average’ range, your chances of securing a loan from a mainstream lender are greatly reduced. However, one option is to apply for a non-conforming loan. An alternative lender offering a non-conforming loan may be willing to overlook your low credit score.

However, the pay-off usually comes in the form of much higher interest rates than a traditional home loan. You may also require a larger deposit and your repayment conditions may be tougher than with a traditional loan. But if you go down this path and meet the repayment conditions, your credit score may improve and you may be able to refinance at a better rate down the track.

How to improve your credit score

If your credit score is too low for you to have a realistic chance of loan approval right now, you can still boost your chances of approval at a later date by working on improving your credit score right now.

There are lots of things you can do to lift your score, including paying off outstanding debt, prompt payment of current bills, diversifying your credit and maintaining credit accounts over the long term, and constantly monitoring your score.