Does Credit Score Matter for Home Loan Approval?

What is a credit score, and why do lenders care?

Your credit score shows lenders how you’ve handled credit and debt in the past, such as car loans, personal loans, or credit card repayments. Lenders care because your credit report and history will alert them to any missed payment patterns, which can serve as a red flag when evaluating your loan application.

Several factors impact your score, including your repayment history, number of credit applications, types of credit used, and any serious infractions, such as loan defaults, bankruptcies, or court judgments.

Credit score ranges and home loan eligibility

Australia’s credit score agencies — Equifax, Experian and Illion — use different scores and ranges. Either way, most weighting is on the number of credit checks, the applications you have made and your repayment history. Generally, your score will range from 0 to 1,200 and fall into bands such as ‘excellent,’ ‘very good,’ ‘good,’ or ‘low.’

While scores may vary slightly across agencies, lenders typically want to see, at a minimum, a good score for a home loan. Anything lower than average will likely make it even harder to qualify, even if you tick all the other boxes.

» MORE: How to check your credit score

How will my credit score affect my home loan application?

A credit score affects:

The amount you can borrow: Lenders may limit how much you can borrow for a home loan based on your score, similar to how your credit score affects credit card limits and personal loans.
Your loan’s rate and terms. Perhaps most importantly, your score can also influence the terms and conditions of your mortgage, including the interest rate. It may also affect your ability to take out less conventional types of home loans.

How does credit score affect refinancing?

Your credit score affects your initial home loan application and potential refinancing options at some point years down the track.

You may want to refinance for any number of reasons, and you can usually use the equity in your current home to refinance — as long as you meet other criteria, such as stable employment. Consistently paying off your current mortgage should positively influence your credit score and be considered a big plus to lenders.

However, your credit score may be negatively affected if you have issues with mortgage stress or have struggled to pay off other loans and bills. So, finding a good mortgage refinancing deal could be difficult. If your current lender doesn’t allow you to refinance, it might pay to ask a mortgage broker about your options.

Can you get a home loan without a credit score?

For young applicants with limited credit history, many lenders will still consider a home loan if other factors that determine eligibility — such as income — are strong in your application.

If you’re young and don’t have much of a credit history, you generally won’t have a score below 500 because you won’t have missed many payments or applied for too many loans yet. In other words, your credit score shouldn’t deter a lender from issuing you a loan as long as you meet their other requirements.

However, the terms you get might be less favorable than they would be for borrowers with established credit histories. So, you’re usually better off waiting until you’ve built a sufficient credit history to qualify for a much better home loan.

Did you know?

No credit check home loans existed in Australia until the introduction of the Uniform Consumer Credit Code in 1996. Now, lenders are required to complete a credit check as part of their responsible lending requirements.

Home loan options if your credit score is low

If your credit score is low for any of the above reasons, you may struggle to get a conventional or competitive home loan simply because most home loan lenders will consider you too high a risk.

Here are some options:

Look into specialist lenders. Some lenders specialize in higher-risk home loans for ‘bad-credit’ borrowers, but you should be wary of proceeding with one of these options. Higher interest rates, elevated fees, and generally less flexible terms and conditions regarding repayments usually accompany the loans they’ll have on offer. On the upside, being approved for such a loan does present an opportunity to repair your credit score while simultaneously paying off your mortgage — though you should be confident it’s one you’ll be able to handle.
Work with a mortgage broker. Once you know your credit score and have spoken to your local bank, consulting a mortgage broker may be worthwhile to see what products they have available and, more generally, your options.
Consider using a guarantor, mainly if your credit history is limited or nonexistent. Some lenders may be more willing to approve your loan with a guarantor, as this person provides added security by agreeing to cover payments if you cannot.
Improve your eligibility. Alternatively, unless you’re desperate to get your foot in the door, consider saving more towards a bigger deposit and repairing your credit score by paying your existing loans and bills promptly. Depending on how low your score is, this may take some time.

» MORE: How to boost your odds of approval