How Does a Bad Credit Score Affect your Home Loan?

March 13, 2020 Pete Mugleston Bad Credit Mortgages

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Whether you’ve been told that you aren’t eligible for a home loan because of your credit score or worried about how a bad credit score could impact your application, the good news is that you still have many options available.

Your credit score affects the interest rates and terms offered to you as home loan lenders will assess your application on a risk-based system. But is your credit score the be-all and end-all, and how exactly does it affect your chances of getting a home loan?

We answer all these questions and more in our guide.

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Can I get a home loan with a bad credit score?

Yes, it’s possible. Experian is the largest credit agency in Australia, and they will assign you a credit score based on your overall activity. Home loan lenders will then obtain a copy of your credit file from Equifax or another credit bureau.

However, it’s important to note that having a poor or low credit score doesn’t necessarily mean that you have bad credit.

Having a bad credit rating can make getting a home loan trickier, though it doesn’t mean that getting a great deal is impossible.

How hard you find getting a home loan will come down to how severe your credit problems are, how long they have been on your credit file, and how closely your overall circumstances meet the lender’s eligibility and affordability criteria.

While some banks won’t accept applicants with specific credit issues, there are specialist providers out there who are more concerned about whether you can afford to meet the repayments and take a more lenient approach. Instead, these lenders will thoroughly assess your application on a case-by-case basis, looking to gauge the strength of your application rather than looking at the number on your credit file.

They will be far less concerned about your actual credit score.

The strength of your credit profile will depend on what your report looks like as a whole, and can increase or decrease based on your overall activity.

But if your score is low, it could be down to one of the following:

Having little to no credit
You’ve missed a few payments
You made some late payments
An account has gone into arrears
You recently opened a new line of credit
You made multiple credit applications within a short time frame
You reached a financial agreement in court (such as bankruptcy)
You have had many different addresses
If you close a bank or credit account (especially if it’s an older account)

For the best advice, speak with one of the experts we work with. They can review your credit file and advise on your next best steps, whether that’s ways to improve your profile before you apply for a home loan or to source great deals from lenders to suit your circumstances.

Credit score and deposit

If you have a smaller deposit of 5% and a low credit rating, you may be able to take out Lenders Mortgage Insurance, which is designed to compensate the lender in case you can’t meet your repayments.

However, both your lender and LMI insurer will take a look at your credit score and record and, should they see something of concern, you may have to write and explain the nature of your adverse before they can make a decision to lend.

If you have a smaller deposit and are concerned about how lenders will assess your application with a poor credit score, get in touch. The independent brokers we work with have access to a vast range of lenders to ensure that you get the best deal for your circumstances.

What should my credit score be?

Equifax will assign you a credit score with the maximum score being 1,200, but if you fall below 509, you are technically classed as ‘high risk’. A credit score between 662 and 725 is classed as ‘good’, which a score of 726 and 832 is ‘very good’ and 833 and upwards is ‘excellent’. The average score for Australian citizens with active credit is 550.

However, it’s best to take this score with a pinch of salt, as your score won’t necessarily mean that you have bad credit. This is why many home loan lenders will assess your application with the help of an underwriter to see if you meet their criteria regardless of your score.

By working with a specialist home loan broker, they can find deals from lenders who take a more lenient approach to your credit score.

What is the minimum credit score for a home loan?

There’s no set ‘minimum’ credit score you need in order to get a home loan, as the credit score you need to buy a home will also be in addition to the lender’s eligibility and affordability criteria. It will also depend on the type of loan you opt for (e.g. owner occupier or investment loan).

What if I have a low credit score?

If you have a low credit score, you may not have a history of borrowing and paying back any debts, so home loan lenders won’t have evidence to see how capable you are with paying back debts. If you apply for a home loan with a low score, lenders may offer you a higher rate of interest to offset this risk.

However, you can build your credit score up before applying for a home loan, which could be with a credit rebuilder card where you purchase something and pay it off in full within the same month.

Moreover, you could always use a broker to find a lender that doesn’t not use credit ‘scoring’ pre se, one which will assess your application on its overall strength.

Could I get a better mortgage with a higher income and bad credit rating?

Yes, a high income can go a long way to getting you a better mortgage, though once again it will depend on a range of other factors including the lender’s terms, the type of adverse credit you have on your file, and your credit file’s history.

While a higher income can give you more options, depending on the type of bad credit you have, your home loan could come with unfavourable terms, which is why you may benefit by working with a specialist lender, who could steer you clear from lenders likely to penalise you based on your credit score and find you lenders who will treat your application fairly.

How can I improve my credit rating?

If you have time to boost your credit rating before applying for a home loan, you could increase your chances of unlocking better terms and interest rates. Some ways to improve your credit score could include:

Make any debt repayments on time
Make few or no hard credit applications within 12 months
Use any excess income to pay off your debts
Get a credit builder card or similar to boost your score
Reduce any credit card debt to less than half the maximum allowance, if possible
Download your credit report and fix any inaccuracies
Consolidate debts into one affordable payment (seek professional advice first)

Soft searches won’t affect your credit score; they won’t be visible to lenders, and only you can see them on your file.

Can I still get a loan if I have a high credit score but low income?

Yes, it’s definitely possible to get a home loan with a smaller income, and especially if your credit score is higher. Again, most lenders will look at your application as a whole before they can agree to lend.

They will look at your monthly outgoings in comparison to your gross monthly income, and question your spending habits if your household expenditure is high.

Another factor will be the amount of deposit you have. If you cannot afford to save up for a deposit of 20% or more, then Lenders Mortgage Insurance (LMI) may be an option for you. By taking it out, lenders may view your application as less risky and offer you a better deal.

How will my credit score be affected once I buy my home?

Once you complete on your mortgage, your credit score will take a temporary hit until you start paying back the loan and demonstrating that you’re comfortable doing so.

Your credit score will improve on its own, so long as you keep meeting your repayments and you don’t take out any other lines of credit to keep your debt-to-income ratio balanced.

Speak to a home loan expert

Your credit score indicates the overall health of your credit profile, though that doesn’t mean that it should be taken as gospel. By working with an experienced home loan broker, they could find you an ideal mortgage from a lender who won’t penalise you based on your credit score alone.

Make an enquiry and we’ll match you with a broker for a free, no-obligation chat about your credit score and home loan options.