You’ve been working hard saving your deposit. You’ve decided on the type of property you want to buy and in what area. But have you taken a moment to consider your credit score before you apply for a home loan?
Don’t worry if you haven’t. It’s not something at the top of most people’s minds when buying a home. But that's not to say it isn't important. We explore what credit score you need to get a home loan. And share our top tips for building your credit score to buy a property.
It’s an exciting time when you decide to buy a property. You've been saving up a deposit for some time and are looking forward to taking that next big step in your life. Because your home is likely to be the biggest purchase you have ever made, you want to ensure you are getting the best deal possible.
To do this, you want to give yourself the best chance of having a lender offer you a great deal. When a lender is looking at your application, not only do they take into account your deposit and income, they also want to know how you have managed your money in the past. The way they do this is by looking at your credit score.
Your credit score is a number between 0 and 1000 that determines your creditworthiness.
The higher the number the better your credit score is.
What credit score is needed to buy a house?
With the rollout of Comprehensive Credit Reporting, lenders are starting to have access to more information to assess borrowers, including information on your past two years’ worth of repayment history.
It’s likely credit scores will become even more important in the future, just as they have done in the USA.
It’s difficult to put an exact figure on how much your credit score should be to buy a house here in Australia. Lenders don’t make this information public.
But there are benchmarks of scores that give some indication of how likely you are to be approved.
- Excellent: Indicated by a score between 800 to 1000. You have an extremely low risk of defaulting in the next 12 months. You’re unlikely to have trouble getting a home loan based on your score and should be offered the best credit terms including a great interest rate. Other factors, such as your ability to repay your loan based on your income and expenses, would be more important for you.
- Very Good: Indicated by a score between 700 to 799. Most lenders would look favourably on you to approve you for a home loan.
- Good: Indicated by a score between 625 to 699. You are still in a fairly good position to be approved for a home loan.
- Fair: Indicated by a score between 550 to 624. This suggests to lenders that you’re likely to suffer an adverse event on your credit file in the next 12 months. Getting approved will be harder but not impossible. Your income and liabilities will play an important part in the assessment process. And you want your repayment history to show you are consistently paying on time.
- Below Average: Any score below 549. This indicates to lenders that you are likely to have an adverse credit event in the next year. Because of this, you may find it hard to get approved for a home loan from a traditional lender.
How do I build up my credit score to buy property?
The best place to start is to check what your credit score is. You can do this by using our free credit score tool.
We'll notify you when your score changes, so you'll easily be able to see if your efforts to improve your score are working.
Following the tips below can assist in improving your score, and get you closer to that dream home you've been after.
Correct any errors
Errors can always happen. If you spot an error on your report, you’ll want to get this corrected as soon as possible by contacting the credit reporting agency.
Identity theft does unfortunately occur, so it can pay to watch for any unusual activity on your report.
Pay bills on time
With so much life admin to be done these days, it’s easy enough to simply forget to pay a bill on time, not necessarily because you don’t have the funds. It could be a simple case of it just slipping your mind.
Late payments can adversely affect your score, so setting up automatic or direct debit payments can really help.
Overdue bills and late payments can stay on your credit report for up to five years.
Don’t make too many credit enquiries
It can be tempting to go to a few lenders to get pre-approval on a home loan before you put in an offer on a property.
But by doing this you could, in fact, be affecting your chances of getting approved.
Hard enquiries for credit are recorded on your credit file each time. So when a lender sees that you have had a number of these in a short space of time, it can send a signal that you may be in a position of financial difficulty.
The best thing to do is research your options before you apply. Then only put in an application if there is a high chance you will be approved.
Consolidate and pay off existing debt
If you have a personal loan and credit card it can be helpful to pay these off, or at least look to reduce them, before applying for a home loan.
You will be in a better position to improve your score if you don’t have the stress of worrying about paying off existing debt.
If you have a credit card and want to keep it, that’s OK. Just try and keep your credit card balance consistently low.
Don’t change jobs
Having a stable job signals to a lender you have a level of financial stability. Where possible try to avoid job-hopping during the period when you will be looking to buy a property.
Your partner’s score matters too
If you have a partner and are looking to apply jointly for a loan, you will need to consider their credit score as well.
If yours is good but your partner’s is bad, it could make it more difficult to get approved and you may face a higher interest rate as a result.
Working together as a team and getting a firm grip on your finances together is essential.