Are you ready to buy a house, or in the planning stages of a home purchase? Either way, it helps to know what banks look for when they evaluate your home loan application. Banks need to make sure you’re likely to repay a home loan according to the terms of your mortgage agreement. In making this assessment, they consider a variety of factors related to your past and present financial situation.
And one specific financial information will the banks look at is your credit score.
Also known as your FICO score, this number between 300 and 850 helps banks get a handle on your past credit history. The higher the number, the better. A low credit score tells banks you’re a risky borrower, and it could be harder to receive a loan.
How is your credit score calculated?
By using a variety of metrics such as:
– Payment history. Do you pay off your credit cards every month or carry a balance? Payment history influences your credit score more than any other factor. A history of timely payments will help your score stay high.
– Credit utilization. This is the amount of credit you use versus the credit you have available. Let’s say your credit card has a $9,000 limit. A balance of $1,800 indicates 20% utilization while a balance of $8,100 indicates 90% utilization. The former is better for your credit score as 90% utilization suggests you’re too overextended to pay bills on time.
– Length of credit history. The longer your history of paying balances and paying back loans, the higher your score is likely to be.
Factors such as the number and types of new credit accounts opened also impact your score, albeit to a lesser degree. Check out FICO’s rundown of credit score metrics for more on how your score is calculated.
There are three main credit reporting agencies in Australia, each with their own set of credit score ranges, usually between zero and 1,200.
These are Equifax, Experian, and Illion. 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
If your score is in this range, getting approval for your home loan is going to be easy as the risk of defaulting in the next 12 months is extremely low. Lenders may even give you more loan options.
Very Good
Your creditworthiness as a borrower is high – so are your chances of securing a home loan.
Good
You are still in a good credit standing with low risk of defaulting on your mortgage in the next 12 months. The chances of getting your mortgage approved is still good.
Fair
The risk of defaulting on your loan in the next year is high if your rating falls in this range. Lenders will need to evaluate your financial situation before approving your mortgage.
Below Average
Your chance of getting a home loan is very low if you have a below average credit score. There are still a few lenders that may grant you a loan, but interest rates will be higher.
Does applying with different banks help for your home loan application?
Many people are not aware that applying for several loans or credit cards in a short period of time has a significant negative effect on their credit score. People who apply for several home loans at the one time are almost always declined, and wonder why they failed a lender’s credit score.
It’s best to work out which banks you can qualify with and then make just one application. If that’s declined then talk to one of our mortgage brokers by calling 1300 889 743 or enquiring online.
Can I trick the bank’s credit score?
Don’t try to “game” the lenders system by changing the information in your loan application.
If their system identifies any inconsistencies between the information on your Equifax credit file, your supporting documents, their own system and your application, then this will negatively affect your score or will result in your loan being declined.
Do you need help to get approved for your home loan? Our mortgage brokers are experts in credit scoring, and can help you to apply with a lender that does not credit score.
Please call us on 1300 280 895 or enquire online and one of our brokers will contact you to go through your situation.
The problems with credit scoring
The main problem of credit scoring is that the accuracy of the decision depends on the accuracy of the data.
Banks are notorious for making mistakes, their systems are unreliable and have lots of problems with maintaining the integrity of the data that they hold.
The other main problem is that credit scoring is incredibly unpopular with customers, the bank staff and mortgage brokers.
Customers feel that they have not been given a fair go. Often there are mitigating circumstances where an application that appears to be a high risk to the system is actually a low risk.
An experienced credit manager could pick this up right away, however in the harsh world of credit scoring, there is no explanation sought from the customer or leniency given.
The reality of your home loan application
As mortgage brokers, we don’t like seeing our customers’ applications assessed by a computer. However, the unfortunate truth about credit scoring is that it’s incredibly accurate at predicting how likely a customer is to default on their home loan.
That is why lenders are hesitant to make an exception and override a decision made by their system.
The great news is that not every lender uses credit scoring!
If you need help to apply with a lender that can accept your situation based on its merits then please call us on 1300 280 895 or enquire online and one of our mortgage brokers will give you a call to discuss your options.