What credit score do I need for a home loan?

When applying for a home loan a potential lender will likely check your credit score. So what minimum credit score do you need for a loan, and what is a lender really looking for? We take a look.

If you’re looking to buy a new home then chances are you’ll need a home loan. So what part does your credit score play in any application and is there a minimum credit score you need for a home loan in Australia?

Your credit score gives potential lenders an idea of how trustworthy you may be as a borrower.

Most lenders will likely check your credit score but this will form only part of their assessment on you and your ability to repay any home loan. It won’t necessarily be a deal breaker and there are ways you can still get a loan with a bad credit score.

How is my credit score calculated?

Your credit score (or credit rating) is calculated based on information on how you handle credit, including how much money you’ve borrowed, your repayment history and the number of applications for credit or loan products you’ve made.

The three main credit reporting bodies in Australia are Equifax, Experian and illion and each may have different information on your financial history and differing methods of calculating your credit score.

You can How do you check your credit score? for free with each of the providers, or do a free Equifax check via Canstar.

If you think there’s been a mistake on your credit score then you can contact the provider directly to try to get the error fixed, free of charge.

Mortgage Choice senior mortgage broker James Algar said potential lenders may use any or all the providers to see what credit score they have for you.

“It’s definitely part of the basket of things that they refer to and some banks are way more sensitive to it than others,” he told Canstar.

Equifax says it uses a credit score range from 0 to 1,200, broken down as below average (0 to 459), average (460 to 660), good (661 to 734), very good (735 to 852), and excellent (853 to 1,200).

The other credit score providers use a range of 0 to 1000, using the same idea that the higher the score the better the rating.

What is the minimum credit score I need for a home loan?

There is no set minimum credit score line to cross to be accepted for a home loan application in Australia. While banks and other lenders will look at your credit score, they generally don’t say publicly what will be an acceptable credit score when considering any application.

Mr Algar said it’s possible that an Equifax credit score about the 600 mark or lower would usually raise a few flags of concern for him but that’s when he’d take a deeper look into what may have affected a person’s credit score.

“Maybe they missed a credit card payment once,” he said. “It could be a number of things.”

Even certain checks on your credit score can count against your score value. These include any checks by any other potential provider of credit or a loan, but not your own check on your credit score.

Read more: How do you check your credit score?

Banks and other lenders generally take a number of things into account when assessing any home loan application. Anything raised by a credit score or credit report may be something that can be easily explained and resolved.

A spokesperson from the Commonwealth Bank told Canstar: “We assess every home loan application on a case-by-case basis and consider a number of factors, including a customer’s income, assets, liabilities and repayment history.”

The bank’s website encourages customers to check their credit score themselves, as it is considered a ‘soft’ enquiry that is not recorded on your credit file. When a lender checks your credit score, that is considered as a ‘hard enquiry’, which can impact your credit rating.

So what do I need to get a home loan?

One of the most important things banks and other lenders will consider when assessing any loan application is your ability to repay the debt.

NAB Executive Home Ownership, Andy Kerr, also told Canstar that a person’s credit score was only part of that assessment.

“We are committed to lending responsibly and want to ensure customers are able to appropriately manage their repayments, both today and in the future,” Mr Kerr said.

“To do this we work with all customers to understand their individual circumstances and assess applications based on a range of measures.”

Most lenders will have their own assessment method to look much deeper into your financial position. They’ll consider things such as:

• what debts you may have
• your income
• how long you’ve been in your current job or employment position
• any other earnings
• your spendings
• your savings
• what amount you have set aside for a deposit.

Having a good history with a potential home loan provider may also be a help, especially if you’ve been with them for some time and have built a good relationship with them.

What lenders are looking for is what’s called “serviceability”. This is your ability to service the loan, i.e. pay back the money they loaned to you.

This also includes your ability to repay the loan if and when interest rates rise. Since 2021 the financial regulator, the Australian Prudential Regulation Authority (APRA), has required lenders to factor in a minimum rate rise of up to three percentage points on any home loan application.

Mortgage Choice’s Mr Algar told Canstar that potential lenders would likely pay more attention to your sevicability than your credit score.

“That’s the absolute cornerstone – if you’ve got good serviceability, then even with a low credit score, some will still help,” he said.

There are some lenders that may still take you on with a bad credit score but you will likely have a smaller range of providers to choose from. These lenders often charge higher interest rates than those available to borrowers with a good credit score.

If you’re already struggling financially, borrowing a large amount of money at a high interest rate might not be a good choice and you would be wise to seek some independent professional financial advice before proceeding.

Financial Counselling Australia, which offers free advice to people facing financial hardship, said it was important people didn’t take on a new debt they would struggle to repay.

“The vital thing to think about when considering taking out a loan, is your capacity to pay,” a spokesman told Canstar.

“Do a budget, work out what surplus is available, and if you think it’s going to be a tight squeeze, then you should probably consider other alternatives that are available to you.”

You can use Canstar’s budget planner to work out your current spending and see what capacity you may have to save.

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