Preparing for a home purchase: is your credit score good enough?
When preparing to purchase a home, you will most likely need the assistance of a mortgage in order to finance your home ownership. When applying for a mortgage, most conveyancing lenders will want to evaluate how likely you are to make timely repayments.
Indeed, lenders want to minimise the risk of mortgage defaults, which can be quite costly to their operations. One of the metrics that determines your creditworthiness is your credit score. Your credit score analyses previous financial transactions and determines your likelihood of meeting the terms of the loan.
This article will explore the impact of your credit score on obtaining a mortgage and factors that can affect your overall credit score.
Qualifying for a mortgage
There are many different criteria that lenders use to determine suitability for a mortgage, one of them being your credit score. A higher score denotes higher creditworthiness and makes you qualify for larger loans.
High scores also enable you to obtain lower interest rates on your mortgage. For example, credit scores of over 800 (on a 0 to 1200 scale) are considered perfect credit. This means that you will most likely have your mortgage application approved, and at lower rates.
Most scores of over 600 will qualify for a mortgage to finance a home purchase. Scores of under 500 may require additional criteria to qualify, such as a higher down payment amount or evidence of cash reserves to avoid defaulting.
Determining your credit score
You may be wondering how the numerical value of your credit score is arrived at. In 2014, the credit system in Australia underwent noticeable changes that introduced comprehensive credit reporting. Lenders now have more information to access your financial history and to determine creditworthiness.
They use a combination of credit inquiries from bureaus (such as Equifax), previous defaults on debt and payment history on current and previous loans to determine a numerical score. The scale goes from 0 to 1200.
Factors that affect your credit score
It is important to understand what can affect your credit score. Some common credit score spoilers include:
Applying for many credit cards: Taking on a lot of debt can negatively influence your credit score. People who apply for many credit cards will often increase their credit inquiries and impact their score.
Defaulting on loan payments: Making late payments or not paying off your previous debt can also lower your score significantly.
A high debt-to-income ratio: If a large portion of your income goes towards paying off existing debt, it can impact your creditworthiness and ability to make timely mortgage payments.
As you prepare to purchase a home, pay close attention to your credit score and try to improve it as much as possible.