- Posted 07 Nov
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While many things can affect your ability to get a home loan, one of the most important aspects of this is your credit score.
Knowing and understanding what your credit score is before you apply for a home loan will allow you to determine how much savings you’ll need and whether you can access lower interest rates. It will also tell you if you’re even able to get a home loan.
What is a Credit Score?
This tells anyone that is looking to lend you money how much of a risk you are. It’s an automated assessment and all creditors will check your credit score before they do anything else.
In relation to a home loan application, your credit score will tell the lender how much risk is associated with lending you money.
Computers calculate your credit score and it is based on your credit file, which is your credit history. So every time that you’ve ever gotten a credit card, opened a bank account or taken out a personal loan, this has been recorded on your credit file.
What is in Your Credit File?
Your credit history is collected and maintained by credit reference agencies like Veda Advantage. They record information such as any loan applications you apply for (regardless of whether you’re accepted or not), any defaults on loans, credit cards and any bankruptcy information.
Changes to what is recorded happened in 2014 where positive credit reporting is now also included. This gives a more accurate view of your ability to pay your debts.
Your credit file helps determine your credit score and any lender that you approach will generate their own automated one as well.
Failed Credit Scores
When applying for a home loan, there are a number of factors that contribute to your credit score. If you fail to get approved for a home loan, it is most often because you don’t meet the lender’s minimum score requirements.
These will be different for each lender and unfortunately, they don’t not publicly publish what the minimum requirements are.
While you can’t know for sure, any of the following that is listed on your credit file could have a negative impact on your credit score:
- Lack of genuine savings (need to show at least 3 months of savings)
- Bad credit history (defaults, loan application rejections etc)
- Unstable employment history
- Unstable address history
- Missed or late payments (ongoing for 3 months or more)
How can you Improve Your Credit Rating?
If your application is rejected, DO NOT immediately apply to another lender. Having multiple rejections from lenders will only negatively affect your credit score further.
The best thing you can do is to see if you can rectify any of the issues causing you to have a low credit rating, then apply for a mortgage again.
Here’s some ways you can improve your credit score:
- Speak to a credit repair expert to help remove any incorrect defaults on your credit file
- Never overdraw your credit card (pay it off each month)
- Make sure payments are made on time
- Pay off any defaults on your credit file
- Don’t move jobs or living addresses until you apply for your mortgage
- Show regular savings (at least 3 months worth)
If you’re credit file is unable to be quickly rectified, there are some lenders who you can approach that don’t use credit scoring. Talk to one of our team members about these options.
The bottom line is, you need to put some pre-thought and planning into applying for a mortgage. Your best line of defence is to know what your credit file says about you BEFORE you apply for a mortgage, so that should you need to sort anything out, you can do so prior to your loan application being lodged.
Here at Australian Credit and Finance we specialise in helping Australian’s find the right home loan to suit individual circumstances. Get in touch with us today to find out how we can help you.