It’s important to get your finances in order before applying for a home loan. In addition to thinking about your income, expenses, assets and liabilities, you may also want to consider your credit score, as this may affect how quickly your application will be assessed, and even if you will be eligible. to certain home loan products.
What is a credit score?
Your credit score is a number that banks and lenders use to quickly assess your level of financial responsibility and the risk that you will default on your loans.
Your credit score is calculated by the credit bureaus. Every time you apply to borrow money in Australia, information is sent to a credit bureau and stored on your credit report. The information in your credit history is used to generate your credit score.
Australians who are used to paying bills on time and successfully borrowing and repaying money are more likely to have high credit scores, while Australians who regularly miss payments or have defaults or bankruptcies in their credit history are more likely to have low credit scores.
How do lenders use credit scores?
When you apply for a credit product in Australia, the lender will likely do a credit check to find out your credit score. The lender will use this information to help assess the risk that you may end up missing your payments.
Borrowers with good credit are generally considered lower risk and may be offered higher loan amounts or lower interest rates and fees. Borrowers with bad credit may be considered higher risk, which may see them offered smaller loans, higher interest rates and fees, or their credit applications may be denied altogether.
How Does Your Credit Score Affect Your Mortgage Application?
When you apply for a home loan, the lender will verify the information in your application. This can include your income and expenses, assets and liabilities, and more. They will also do a credit check as part of the application process, and borrowers with good credit may have an easier time getting a home loan than borrowers with bad credit.
When you apply for a home loan with a good credit score, the lender may feel more confident about lending you money and may be able to process your home loan application faster. But if you’re applying for a home loan with a less than stellar credit score, the lender may feel the need to check your application further to make sure you can afford the loan and handle repayments.
According to Faith Brockhoff, Chief Client Officer of Tic:Toc, credit scores are becoming more and more important than they have been in the past:
“A good credit rating can translate into a simpler assessment. For Tic:Toc, credit ratings do not affect the product or interest rate we offer to a customer. We believe they are just one of many factors that can affect how a borrower may be assessed. »
How can you improve the chances of your mortgage application being approved?
Even if your credit score isn’t the best on the block, there may be other options to consider to help increase the chances of your home loan application being approved, such as:
- Save a larger deposit
- Limit your household expenses
- Cancellation of unused credit cards
- Apply for a joint loan with a borrower with good credit
- Avoid career changes
- Get help from a guarantor
- Get help from a mortgage broker
How can you improve your credit rating?
Sometimes improving your credit rating can be as simple as checking your credit score for free and correcting any errors in your credit history. But otherwise, increasing your credit score can mean avoiding negative credit events and keeping a record of positive credit events over a long period of time.
“Individuals should be aware of the impact of applying for regular credit, as having multiple inquiries on a credit report can also be a problem,” says Tic:Toc’s Faith Brockhoff. “One of the ways to have a positive impact on their credit score would be to pay bills, loans and credit cards on time.”