Credit checks are crucial in helping lenders decide whether or not to approve home loan applications. A potential borrower could have sufficient savings for a deposit and steady income to repay the loan. Still, it’s their credit score that tells the lender about their financial responsibility. Lenders may prefer borrowers with at least an above-average credit score, but even those with a low credit score do stand a chance of getting a home loan.
For borrowers with a low credit score, lenders may offer smaller home loans and possibly higher interest rate. As a borrower with a low credit score, you’ll likely only be offered a loan amount that is under 80 per cent of the property’s value. Lenders may also charge a higher interest rate or require you to purchase lender’s mortgage insurance (LMI). If you have a low credit score and are about to apply for a home loan, you may want to check if you can improve your credit score before applying.
What do I do if mortgage lenders consider my credit score low?
The first thing to do if you’re worried about your credit score is to request a free credit report from one of the three Aussie credit rating agencies. You’re entitled to access your credit report without charge once a year. This report can tell you about the credit-related incidents that have affected your credit score positively or negatively. While you may not discover the exact impact on your credit score, you can get a sense of what may be impacting your credit score. Your credit report is the information used to calculate your credit score, and you can use our free credit score tool to get your credit score.
Once you know what your score is and what part of your finances is impacting this score from your credit report, you can improve your score. For instance, you could review all the current debt you have in credit cards, personal loans or other debt. Do you need it all still? Could you close some credit cards or lower your credit card limit? Could you pay off that personal loan sooner or pay off your credit card more than the minimum repayment? Any of these actions may help you improve your credit score.
Your credit score may remain low for a few years if a major negative incident has been reported against you. An example of an incident with a longer-term impact on your credit score is bankruptcy or any sort of default on a loan, credit card or utility bill. A default would be reported if, for instance, you missed paying a utility bill for long enough that your provider tried multiple times to contact you without any response. If you’ve taken steps to remedy this, you can try explaining this to the lender to assure them of your financial responsibility. You could also submit the details of how you’re rectifying the situation to the credit reporting agencies to have the negative mark removed from your credit file. Earning a steady income, minimising your debts, and paying off existing debts may be the surest ways to convince a lender that you’ll pay back their loan.
Apart from taking steps to improve your credit score, you could ask the lender about the loans they recommend for your financial situation. You could also consult a mortgage broker about the lenders who might give you more suitable loan options.
Whatever you decide to do, you should remember that a home loan is a significant debt that will take years to repay. This means you don’t have to be locked into the loan you get when you first purchase the property. You can refinance when your credit score improves. You want to get a loan with the most favourable terms to avoid paying a lot more than you can comfortably afford.
Are there special home loans for first-time homebuyers with a low credit score?
Some first-time homebuyers may have low credit scores or no credit score through no fault of their own but because they’ve never taken on debts before. If you’re one of these borrowers, lenders may suggest you take steps to build a healthy credit rating before applying for a home loan. For most people, a credit card may offer the simplest route to boosting their credit history, but only if you limit the amount the card is used, it’s credit limit and pay them back in full. You also need to be aware that applying for multiple credit cards or limit increases can negatively impact your credit score.
Another option could be asking someone from your family to sign onto the loan as a guarantor. This just means that the person will take responsibility for the loan if you fail to repay it. It’s a way lenders limit their risk in these circumstances. You’ll still need to show that you earn enough to repay the loan and have the savings to pay a deposit.