What credit score do I need to buy a house?

What credit score do I need to buy a house?

Kathryn Lee - 30 Oct, 2019

Want to buy a house one day but unsure of what a credit score is and what it means?

The lingo surrounding buying a house can be confusing at first. Here’s everything you need to know about credit scores and how they can impact you buying a house.

What is a credit score?

A credit score helps a financial institution understand whether they should offer you money or credit. Your credit score is determined by looking at your credit report to assess how trustworthy you appear as a borrower.
A credit report is a record of your financial history from a range of sources such as banks, credit card companies, and public records. Here, you’ll find information such as late repayments, non-payments, the number of credit applications you’ve made, and any personal insolvency agreements relating to bankruptcy.
A credit score reduces your credit report down to one number. A mathematical algorithm is applied to predict future behaviour. It’s simple – the higher the score the more trustworthy or credit-worthy you’ll appear to a lender. A lower score means you have a bad credit rating. This score regularly fluctuates depending on what you find in your credit report.

How your credit score affects your mortgage rate

Your credit rating is important as it alters how much a financial institution is willing to offer you; this becomes your credit limit. It also affects other terms of the agreement, including the interest rate. If you appear trustworthy the lender will be more relaxed in what they offer you.

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What credit score do I need to buy a house?

Credit score bands are usually measured between 1-1,000 or 1-2,000. Equifax is Australia’s frontrunner in credit reporting. It has credit information for more than 18 million Australians and is used by a majority of lenders and credit providers.

Here are their credit score bands to give you an idea of the scale:

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  • Excellent (833 – 1,200): You’re highly unlikely to have any adverse events arise to harm your credit rating over the next 12 months.
  • Very Good (726 – 832): You are unlikely to have an adverse event arise in the next 12 months.
  • Good (622 – 725): You are less likely to have an adverse event in the next 12 months.
  • Average (510 – 621):  You are likely to have an adverse event arise in the next 12 months.
  • Below Average (0 – 509): You are more likely to have an adverse event in the next.

But different banks can have their own scoring systems. Commonwealth Bank, for example, has a five-tier credit scoring system:

  • 1 or 2 means you’re a great customer.
  • 3 means your loan will be assessed normally, based on its merits.
  • 4 or 5 means it’s very likely your loan will be declined.

Other major banks such as NAB or Westpac have their own scoring systems, meaning there is no one magic number which secures a home loan.

As a result, it’s quite possible that you could pass with one lender but fail with another.

Lowest scores and expectations

Yes – it is possible to get a loan with a bad credit score, but this will come at a cost. The first thing to note is that the big banks are unlikely to consider your application – even if your blip was for good reason. With a specialist lender or a non-conforming lender, you can probably expect a higher interest rate for the sum of money you secure. But, if you manage this loan well for a few years, you can refinance and move over to a big bank.

As mentioned earlier, there is no number or score which means you pass a loan assessment. Instead, it’s based on how much risk a lender is willing to accept.

How to prepare before searching for home loans

What if I have no credit history?

Those after a home loan who have never had a credit facility like a credit card, car loan or even a mobile phone contract are “untested” in the eye of lenders.

With nothing to support your promise of being a reliable lender, you are seen as a high-risk borrower.

Some lenders may ask you to first prove yourself with a small credit card before jumping into the deep end. Once you have a six-month history, borrowing becomes easier with most lenders.

Words by Michelle Elias

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