Banks and other financial institutions use different criteria to determine if you are in a stable financial position to get a home loan, including your income, work history, age, and savings. But having a good credit history and an above average credit score can improve the chances of getting your loan approved.

Here are some of the most important things you need to understand about your credit rating and how it affects your ability to get a mortgage.

What is a credit score?

A credit score, also known as a credit score, is a number assigned to you that represents your reliability or creditworthiness as a borrower. Your score helps lenders understand your credit health. It shows them how well you manage your finances and your ability to make monthly repayments.

There are three major credit reporting agencies in Australia, each with their own set of credit rating ranges, typically zero to 1,200. These are Equifax, Experian, and Illion. The table below summarizes the score ranges for each provider, as well as the odds of qualifying for a home loan.

Sources: Equifax, Experian, Illion

Excellent
If your score is within this range, it will be easy to get your mortgage approved because the risk of default in the next 12 months is extremely low. Lenders may even offer you more loan options.

Very well
Your creditworthiness as a borrower is high, as are your chances of getting a mortgage.

Good
You still have a good credit rating with a low risk of defaulting on your mortgage over the next 12 months. The odds of getting approved for your mortgage are always good.

Fair
The risk of your loan defaulting over the next year is high if your rating is within this range. Lenders will need to assess your financial situation before approving your mortgage.

Below average
Your chances of getting a home loan are very low if your credit score is below average. There are still a few lenders who can give you a loan, but the interest rates will be higher.

How is your credit score calculated?

Your credit score says a lot about the health of your credit to lenders and is influenced by several factors. These include:

• The number of times you’ve applied for a credit card or loan
• The type and amount of loan you requested
• Your payment history
• The number of times you’ve defaulted on debt
• Any writ of court or default judgment

What’s the ideal credit score you need to get a home loan?

It is always best to aim for a high credit score because your score plays a crucial role in helping lenders determine how much you can borrow and the interest rates they will give you. Some lenders also offer attractive loan features for borrowers with above-average credit scores, including lower interest rates and higher credit card limits.

Can You Still Get A Home Loan With A Low Credit Score?

Having a bad credit or bad credit rating doesn’t necessarily mean your dreams of home ownership are over. You can always apply for a home loan from a specialized lender. These lenders, also known as non-conforming lenders, offer home loans to high-risk borrowers or those with low credit scores. These loans, however, often have higher interest rates and limited loan options due to the risks involved.

If you have a low credit score and decide to go this route, it’s best to consult with an experienced mortgage broker because they know which lenders are offering home loans that are right for your financial situation. If you apply directly to the bank or lender and are refused, it will lower your credit rating even further, as each request will be reflected on your credit report.

How Can You Improve Your Credit Score?

Building your credit score requires a lot of self-assessment and planning. Here are some simple strategies that can help you improve your credit score.

• Be aware of your daily expenses.
• Pay your bills on time.
• Don’t ask for too many credit cards.
• Lower the limit on your existing credit cards.
• Check your credit report to make sure the information on it is correct and accurate.
• Limit discretionary spending.
• Maintain a budget that saves you money.