Credit Scores and Home Loans: What You Need to Know

Your credit score is one of the first things a lender looks at when you apply for a home loan. A low score doesn't always rule you out, but it can limit your options. It's worth knowing where you stand before you apply.

Does Your Credit Score Affect Your Home Loan Application?

Yes. Lenders use your credit score and credit report to judge how reliably you've handled debt in the past. That can affect whether they approve you, how cautious they are, and which products they offer.

The report behind the score shows your repayment history, your credit cards and loans, and any applications you've made. Lenders also weigh up income, savings and living costs, so the score is one piece of the picture. Even so, a clean file makes the process smoother. It also gives you more home loan options to choose from across different lenders.

What Do Equifax Credit Score Bands Mean?

Equifax, which many lenders use, scores from 0 to 1200. Scores sit in bands: below average (0 to 459), average (460 to 660), good (661 to 734), very good (735 to 852) and excellent (853 to 1200).

Other credit bureaus use different scales, so a number from one isn't directly comparable to another. Lenders also set their own rules, so there's no single score that gets everyone approved. If your score sits in the lower bands, it helps to talk to a broker before you apply. Some lenders are more flexible than others, and a broker can point you to them.

How Many Credit Enquiries Is Too Many?

One home loan application is normal, but several in a short period can make lenders cautious. Each time you apply for credit, the lender's check is recorded on your file, and that enquiry stays there for five years.

This catches out people who apply directly with three or four banks to compare rates. Each formal application leaves a mark, even if you only end up taking one loan. It also applies to credit cards, personal loans and car loans, so lots of small applications add up.

A sensible approach is to compare lenders and home loan rates before anything is lodged, then submit one well-prepared application. A broker can do the comparing for you, which keeps the number of formal applications low.

How Checking Your Credit Report Early Can Fix Problems: An Example

Checking your report three to six months before you apply gives you time to spot and fix errors. As an example, consider a first-time buyer in Melbourne's west who plans to apply for a first home loan.

They order their report and find an old phone account listed as overdue, even though they paid it years ago. They contact the provider and ask for the listing to be corrected. Because they started early, the fix is done before any lender sees the file. When they later apply, the application goes ahead without a surprise default holding it up.

Getting your report costs nothing to start with. By law, each credit reporting body must give you a copy of your report once every three months at no charge. Ordering your own report will not harm your score.

The trade-off is time. Corrections can take a while, so leaving it until you've found a property puts you under pressure. If you're a first home buyer, this is a good first step.

Credit Habits That Help Before You Apply for a Home Loan

The habits that matter most are paying every bill on time and avoiding new credit in the months before you apply. Late payments can damage your credit file, and defaults and other serious listings can be more damaging still. New applications also add enquiries.

A few other habits are worth building in the lead-up:

• Close credit cards you don't use, or ask your lender to lower the limit, because lenders generally assess the full card limit when working out how much you can borrow, even if the balance is zero.
• Hold off on car finance or personal loans until your home loan is settled.
• Keep your contact details up to date with providers so you don't miss a bill.

These habits can also help you improve borrowing capacity, which affects your loan amount. The trade-off is that you may need to wait or delay a purchase. That wait can be worth it if it widens your choice of lenders.

If you already have a home loan, your credit file matters again when you want to switch. A lender will check it before approving refinancing, so the same habits apply. A stronger file can also give you more room to ask for interest rate discounts, depending on the lender and your loan size.

If you're not sure where your file stands, speak to us before you apply for a home loan. We can talk through your report, explain what lenders are likely to see, and help you plan a path to home loan pre-approval. Call one of our team or book an appointment at a time that works for you.

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