What credit score do I need to buy a house?

Are you thinking about taking the next big step in your life and applying for a home loan? Buying your own property is a major part of becoming financially stable in the future, because you have a huge investment as a part of your portfolio. However, if you don’t have a clean credit report, you could find it difficult to get favourable terms on your mortgage.

When a lender looks at your application for a home loan, they’ll consider more than just how much money you earn with your partner, or your total deposit. They’ll also look at how sensible you’ve been with money in the past.

Advantages of a clean credit report in Australia

Having a clean credit report means lenders will see you as a responsible borrower. Their risk is lowered because you’ve proven you’re less likely to default on payments. They are therefore more likely to offer you a lower interest rate and give you a longer loan term (more time to repay).

While you should ideally have 20 per cent of your home loan total saved for a deposit to avoid having to pay for lenders mortgage insurance (LMI), some home loan providers could offer you a greater total loan amount if you have good credit. While this means you’d have to pay for LMI as well, it could help you get into your dream home sooner than you thought possible.

Buying a home with bad credit

It is possible to buy a home with bad credit, but ultimately you may have to pay more over the term of your mortgage. Lenders may not  offer you the same interest rates as people with good credit because of the perception that you pose more of a risk. There are some specialty lenders who offer home loan products designed to suit those with bad credit.  This may mean you can still take the next step in your life without having to wait five years for that pesky default to come off your credit report.

Your credit report affects your overall credit score, and home loan lenders are likely to look at both to determine your risk level. Your credit score characteristics are:

• Excellent: The top credit score is 1,000 (3.5% of Aussies)
• Superb: 800 to 999 (22% of Aussies)
• Great: Between 700 and 799 (41% of Aussies)
• Average: Between 500 and 699 (23% of Aussies)
• Room to improve: 300 to 499 (3 % of Aussies)
• Below average: 0 to 299 (7.5% of Aussies).

These percentages are correct as of April, 2018.

Borrowers with a credit score in the Excellent range will be offered the best credit terms, including a great interest rate. Repayments are likely to  be structured to suit your needs so you’re likely to be in the most beneficial spot financially.

Those benefits are likely to decrease along with  a lower credit score. As you drop into lower categories due to missed payments or lots of credit enquiries, the interest rates you’re offered are likely to be higher, making your total loan repayments either take longer or be more expensive per month. Your lender is less likely to be flexible with your loan terms as well, because they may not perceive you as  a reliable borrower.

If  you have a Below Average credit score, and defaults listed on your credit report, you’re more likely to have to turn to specialised bad credit home loan providers. While these lenders are likely to offer  high interest rates and often require a strict 20 per cent minimum deposit to minimise their risk, still the service  offers you the chance to buy a home and become more independent. Bad credit doesn’t stop you from taking the next step up the ladder of life, but it can certainly make it more expensive.

Your partner’s good credit report matters

When you’re thinking about applying for a home loan, you’ll have to consider your partner’s finances as well. If either of you has a bad credit report or low credit score thanks to some bad decision-making or money management in the past, you’ll both suffer a higher interest rate.

If your partner has a clean credit report to match yours, you’ll be seen as having a stable financial base and lenders will jump at the opportunity to fund your endeavours. What’s more, people with better money management skills are more likely to stay together, according to research from the US Federal Reserve.

The research points out that people with good credit scores are more likely to get married, or more likely to find a partner with a similar credit history. Couples with mismatched credit reports or scores may be less likely to stay together. If both of you have a firm grip on your finances, you’re unlikely to miss a repayment or bill or anything else to do with money. Not only does your partner’s credit report matter to your chances of buying a home together, it’s may also be a fair indication of how successful the relationship is likely to be in the long run.

A good credit report can help you to buy a home, and may make it more affordable over the long run. For more information about your current credit report, get in touch with Credit Simple today.