Credit scores can affect your home loan application - what you need to know

It’s important to get your finances in order before applying for a home loan. As well as thinking about your income, expenses, assets and liabilities, you may want to also consider your credit score, as this could affect how quickly your application gets assessed, and even whether you’ll be eligible for a some home loan products.

What is a credit score? 

Your credit score is a number that banks and lenders use to quickly assess your level of financial responsibility, and the risk that you could default on loan repayments.

Your credit score is calculated by credit bureaus. Every time you apply to borrow money in Australia, information is sent to a credit bureau and recorded in your credit file. The information in your credit history is used to generate your credit score.

Australians who have a record of paying their bills on time and successfully borrowing and repaying money are more likely to have high credit scores, while Australians who regularly miss payments or have defaults or bankruptcies in their credit history are more likely to have low credit scores.  

How do lenders use credit scores? 

When you apply for a credit product in Australia, the lender will likely conduct a credit check to find out your credit score. The lender will use this information to help assess the risk that you could end up defaulting on your repayments.

Borrowers with good credit are generally seen as lower risks, and may be offered higher loan amounts or lower interest rates and fees. Borrowers with bad credit may be seen as higher risks, which may see them offered smaller loans, higher interest rates and fees, or their credit applications may be turned down altogether.  

How does your credit score affect your mortgage application? 

When you apply for a home loan, the lender will check the information in your application. This may include your income and expenses, your assets and liabilities, and more. They’ll also conduct a credit check as part of the application process, and good credit borrowers may have an easier time getting a home loan than bad credit borrowers.

When you apply for a home loan with a good credit score, the lender may feel more confident about lending you money, and may be able to process your home loan application more quickly. But if you apply for a home loan with a less-than-brilliant credit score, the lender may feel the need to check your application more thoroughly to make sure you can afford the loan and manage the repayments.

According to Tic:Toc chief customer officer, Faith Brockhoff, credit scores are becoming increasingly more important than they have been in the past:

“A good credit score can result in a more streamlined assessment. For Tic:Toc, credit scores do not impact the product or interest rate that we offer a customer. We believe they are just one of the many factors that can impact how a borrower may be assessed.”

How can you improve your home loan application’s approval chances? 

Even if your credit score isn’t the best on the block, there may be some other options to consider to help increase your home loan application’s chance of approval, such as:

• Saving a larger deposit
• Limiting your household expenses
• Cancelling unused credit cards
• Applying for a joint loan with a good-credit borrower
• Avoiding career changes
• Getting help from a guarantor
• Getting help from a mortgage broker

How can you improve your credit score? 

Sometimes improving your credit rating can be as simple as checking your credit score for free and correcting any errors in you credit history. But otherwise building up your credit score can mean avoiding negative credit events and maintaining a record of positive credit events over an extended period of time.

“Individuals should be aware of the impact of applying for regular credit, as having multiple enquiries on a credit report could also be an issue,” says Tic:Toc’s Faith Brockhoff. “One of the ways which would positively impact their credit score would be paying bills, loans and credit cards on time.”

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