If you’re currently in the market for a home loan, you may have concerns about how a lender will view your application. Income, occupation and age are all factors that can potentially affect your ability to secure a home loan. However, your credit score can also be an important factor your lender takes into consideration when evaluating your loan application.
For this reason, it’s a good idea to refresh your knowledge of your current credit score, and think about whether you could be doing more to maintain and/or improve it. Your credit score could potentially be the defining factor when it comes to your creditworthiness – in other words, how suitable you are to receive credit.
→ Related article: How to Check Your Credit Score And Why You Should
How does a lender figure out my credit score?
A lender will calculate your credit score based on several factors, including the amount of credit you have accessed in your life, whom you accessed it from, and how good you were at paying it back. And lenders use different algorithms to calculate your credit score. Some enlist the services of credit reporting agencies, others make the calculations in house.
While there are different ways of calculating credit scores and overall creditworthiness, broadly, lenders take into account a similar list of factors, including:
- Your current financial situation
- Current income
- Spending habits
- Your borrowing history
- The number of times you’ve applied for credit
- How much credit you applied for
- Your repayment habits
- Your employment history
- Your address history
This means if you’re gearing up to start comparing home loans, you should be conscious of the things listed above, and whether any of them might appear on your credit report as less than stellar. You should also ensure you’re looking at home loan products that offer you the best value possible. And this is where Canstar can help:
I have a poor credit score. Can I get a home loan?
If your credit score isn’t as good as you’d like it to be, it doesn’t necessarily mean that you can’t get a home loan. However, you may only be eligible for certain home loans, for example those with higher interest rates and fewer features.
There are lenders who specialise in home loan products designed for people with less-than-perfect credit scores. Their products may not be as attractive as some other home loans, but they could be a starting point worth consideration.
If you exercise financial diligence, after a few years of being smart with your money and making repayments on time, your credit score may improve to a point when you can refinance your home loan with a more attractive interest rate.
My home loan application got denied – now what?
If your home loan application is unsuccessful, it doesn’t mean you are out of options. That being said, it may not be the best idea to immediately apply for a different home loan from another lender. One of the things that can affect your credit score is how many times you’ve recently applied for any sort of credit or loan, along with whether you were successful or not.
This means your credit score may actually be lower after an application for a home loan is denied. In this instance, you may want to consider working on your credit score, by exercising financial prudence for a few months. While improving your credit score may be easier said than done, it’s not impossible.
Could deferring my home loan or missing a repayment affect my credit score?
If you apply for a home loan deferral, as long as you aren’t in arrears, your mortgage holiday should not negatively affect your credit rating. But remember, during your holiday period your loan will still accrue interest, which in turn will then compound. So after the loan period has finished, you’ll face a larger sum to pay off.
In normal circumstances, a default on credit can occur if you fail to pay an expected debt, like a credit card repayment or loan. If your debts remain unpaid, your provider is likely to get in touch with a credit rating agency to report the default, which can then show up on your credit report.
The most important thing to remember if you are in mortgage stress is to talk to your lender as soon as possible. If you tell your lender you’re in financial hardship and having trouble meeting your monthly repayments, they are obligated by law to assist you in setting up an affordable repayment plan.
How can I improve my credit score?
Improving your credit score is not something you can do overnight. But, in the short term, you can assess your financial situation and put together a plan to help guide you towards a better credit score.
This plan could include:
- Figuring out your regular expenses
- Putting together a disciplined payment schedule for any current debts
- Building a budget that allows you to save a regular amount every fortnight/month, while still making any debt repayments necessary
- Setting a reminder for paying bills
- Consider consolidating your debt, if that is beneficial for your personal situation
- Putting the brakes on any further discretionary spending
Changing your credit score for the better can be a challenge, but the sooner you start, the sooner your credit score might start creeping up!
About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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