Will a limited credit history affect my home loan application?

If you’re approaching a bank for a home loan, then odds are you’re asking for an amount of money that has six figures or more. It’s a significant sum, and before banks deposit it into your account, they want to know they’ll receive their investment back -- with interest too.

A credit history brings some method to this process by allowing them to evaluate the risks posed in both issuing a loan and how much money should be issued.

There’s some criteria banks will ask for from the get go. And it’s the kind of foundational stuff found in a credit history.

Show us the income you’ll use to make repayments

Commonwealth Bank, Westpac, NAB and ANZ all require payslips as part of their home loan applications. Nor are they alone in asking for some record you’re regularly earning money, as most financial institutions will require proof of an income.

If you hold a savings account with one of these banks -- and your income is deposited into it -- then you’re already on your way to building up your credit history. Otherwise, they’re going to request about two or three payslips to establish a pattern that your income is recurring.

A bank may ask if there’s any bills in your name too, such as an internet bill or a utility, as they can be used to establish your credit history, but not having any isn’t necessarily a deal breaker.

I just turned 18. Or I’ve just come from overseas.

There’s a few reasons why you might not have a credit history. You may have just turned 18 -- the legal age to sign a contract in Australia -- or might be new to the country.

But they’re not the only reasons. Many credit histories are built on relatively small bills and utilities, such as an electricity or phone bill, and then grow as you sign up for bank accounts, credit cards and loans.

If you haven’t held any of these in the past, then it’s possible your credit history could be a blank slate, and this could make it harder for you to both secure credit and secure it on the cheap.

The credit you’re hoping to secure will take into account the scope of your credit history. The bar for a credit card with a modest balance is a lot easier to clear than that of a mortgage, for instance.

Why do you need to have a credit history?

We’d like to think our word is our bond, but in the finance world, that’s simply not enough. It’s for this reason we use credit histories to calculate credit scores.

A credit history documents all of your finances, your transactions and your defaults. This information is summarised into a credit score businesses can use to evaluate whether they’ll lend you money or provide a service.

What benefits are there in beefing up my credit history before securing a loan?

Businesses want customers who have a track record of reliably repaying their debt. It’s for this reason they’re more likely to offer customers with a better history more competitive deals that could save them money.

Depending on the credit reporting agency, your credit score will vary between zero and either 1000 or 1200, according to the government’s MoneySmart website. The score correlates to a five point rating system: excellent, very good, good, average and below average.

Lenders will use this scale to calculate the risk involved in lending you money, and price the credit they issue you accordingly.

What can I do to improve my chances of securing credit?

Banks, credit agencies and service providers may take inventory of your assets and liabilities before they decide they want to do business with you.

Take stock of what you own that’s of value, including your car, furniture and electronics. These assets demonstrate you can stash money away to make a decent purchase, and perhaps more importantly, that you have assets that potentially could be used as security if you default on the loan.

If you have any outstanding debts for services, like rental repayment or a phone bill, tend to them. It’s best to let some time pass before lodging any applications too to demonstrate you’ve found your financial footing again.

Do I need to have savings?

Yes, because in almost all cases, you’ll need a down payment to secure the mortgage. This is generally from 5 to 20 per cent of the property’s value.

And if you live in a state that charges stamp duty, you’ll likely need thousands of dollars in savings on top of your deposit.

Think of these as property goals. Saving a deposit and the cost of stamp duty are two good indicators that you can afford home ownership.

It’s likely the banks think of it this way, too.

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