What Credit Score Do You Need to Get a Home Loan?
Your credit score, also known as Equifax Score, is used by your potential lender to determine the risk of offering a loan to you. This is an automated rating system and based on your credit file as well as the information you have provided in your application.
It is not easy to determine the specific credit score you need to achieve to qualify for a home loan, mainly because most Australian lenders don’t publish their credit criteria. Furthermore, most lenders don’t depend solely on your credit score to assess your risk. Rather, they also use their own credit evaluation alongside your Equifax Score.
Even though there is no definitive range to surely qualify for a home loan, Equifax has benchmarks that you can use as reference so you have an idea if your score can make the cut.
- Below 509 (Below Average) – If your score falls below 509, you are considered a high risk, so you may find it difficult to obtain finance from conventional lenders. Some lenders consider granting a home loan with this score but the interest rates are usually very high.
- 510 to 621 (Average) – Around 20 to 40% of Australians are in this category. This usually means that you have some negative notes on your file and you may need to provide additional requirements to get approval. But remember, most lenders will still consider their own evaluation as well as your income level in approving your home loan.
- 622 to 725 (Good) – This places you in good standing and you have a better chance to be approved for a home loan with lower interest rates than those with average credit scores.
- 726 to 832 (Very Good) – You belong to the top 40% of Australians who are considered creditworthy. Most lenders will be happy to offer you a home loan.
- 833 to 1200 (Excellent) – Home loan providers will interpret an excellent score as extremely low risk that you will default on your loan. You will find it easy to get an approval, and you can choose from more options.
How Is Credit Score Calculated?
Your credit score is calculated by Equifax based on the information filed in your credit report at a specific point in time. There are several important contributing factors that are considered in calculating your credit score. This includes the type of credit provider, the type and size of credit requested in your application, the number of credit enquiries and shopping patterns, directorship and proprietorship information, age of credit report, pattern of credit enquiries over time, personal details, court writs and default judgements, and more. To learn more about how Equifax calculates your credit score, you can visit the company’s official website.
Home Loan for Australians with Below Average Credit Score
In Australia, bad credit home loans are offered by non-conforming Home Loan lenders. In this type of special loan, all circumstances are considered, and applications are evaluated on a case to case basis. These loan providers are generally helping people with a bad credit rating with another chance to gain control of their finances.
In fact, industry statistics indicate borrowers who have successfully applied for bad credit home loans have lower default rates compared to borrowers with clear credit.
Express Mortgage Market is a bad credit expert who can consider most non-conforming loan scenarios, whether for refinancing or purchase.
For inquiries, call Express Mortgage Market on 1300 663 997 or send email to [email protected]
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Your credit score, the number that lenders use to estimate the risk of extending you credit or lending you money, is a key factor in determining whether you will be approved for a mortgage. The score isn’t a fixed number but fluctuates periodically in response to changes in your credit activity (for example, if you open a new credit card account). What number is good enough, and how do scores influence the interest rate you are offered? Read on to find out.
Key Takeaways
- In general, a credit score above 670 will allow potential mortgage borrowers access to prime or favorable interest rates on their loan.
- Scores below 620 are considered to be subprime, and come with higher interest rates and more restrictions due to their greater risk to lenders.
- To qualify for a low down payment FHA-backed loan, you'll need at least a 580 FICO credit score.
- Those with worse credit may still be obtain to obtain a mortgage from specialty lenders but will pay even higher rates, require larger downpayments, may require a guarantor or co-borrower, and be subject to income verification.
How Are FICO Scores Determined?
The most common credit score is the FICO score, which was created by Fair Isaac Corporation. It is calculated using the following different bits of data from your credit report:
- Your payment history (which represents 35% of the score)
- Amounts you owe (30%)
- Length of your credit history (15%)
- Types of credit you use (10%)
- New credit (10%)
What Is the Minimum Credit Score to Qualify for a Mortgage?
There is no “official” minimum credit score since lenders can (and do) take other factors into consideration when determining if you qualify for a mortgage. You can be approved for a mortgage with a lower credit score if, for example, you have a solid down payment or your debt load is otherwise low. Since many lenders view your credit score as just one piece of the puzzle, a low score won’t necessarily prevent you from getting a mortgage.
What Lenders Like to See
Since there are various credit scores (each based on a different scoring system) available to lenders, make sure you know which score your lender is using so you can compare apples to apples. A score of 850 is the highest FICO score you could get. Each lender also has its own strategy, so while one lender may approve your mortgage, another may not—even when both are using the same credit score.
While there are no industry-wide standards for credit scores, the following scale from personal finance education website www.credit.org serves as a starting point for FICO scores and what each range means for getting a mortgage:
• 740–850: Excellent credit – Borrowers get easy credit approvals and the best interest rates.
• 670–740: Good credit – Borrowers are typically approved and offered good interest rates.
• 620–670: Acceptable credit – Borrowers are typically approved at higher interest rates.
• 580–620: Subprime credit – It's possible for borrowers to get a mortgage, but not guaranteed. Terms will probably be unfavorable.
• 300–580: Poor credit – There is little to no chance of getting a mortgage. Borrowers will have to take steps to improve credit score before being approved.
FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, offers loans that are backed by the government. In general, the credit requirements for FHA loans tend to be more relaxed than those for conventional loans. To qualify for a low down payment mortgage (currently 3.5%), you’ll need a minimum FICO score of 580. If your credit score falls below that, you can still get a mortgage, but you’ll have to put down at least 10%.
Interest Rates and Your Credit Score
While there’s no specific formula, your credit score affects the interest rate you pay on your mortgage. In general, the higher your credit score, the lower your interest rate, and vice versa. This can have a huge impact on both your monthly payment and the amount of interest you pay over the life of the loan. Here’s an example: Let's say you get a 30-year fixed-rate mortgage for $200,000. If you have a high FICO credit score—for example, 760—you might get an interest rate of 3.612%. At that rate, your monthly payment would be $910.64, and you’d end up paying $127,830 in interest over the 30 years.
Take the same loan, but now you have a lower credit score—say, 635. Your interest rate jumps to 5.201%, which might not sound like a big difference—until you crunch the numbers. Now, your monthly payment is $1,098.35 ($187.71 more each month), and your total interest for the loan is $195,406, or $67,576 more than the loan with the higher credit score. A mortgage calculator can show you the impact of different rates on your monthly payment.
It’s always a good idea to improve your credit score before applying for a mortgage, so you get the best terms possible. Of course, it doesn’t always work out that way, but if you have the time to do things like check your credit report (and fix any mistakes) and pay down debt before applying for a mortgage, it will likely pay off in the long run. For more insight, you might want to investigate the best ways to rebuild your credit score quickly, or simply the best ways to repair a poor credit score. Alternatively, if you don't have the time to fix your credit score, it might be worth looking into one of the best credit repair companies to do it for you.
The Bottom Line
Even though there is no “official” minimum credit score, it will be easier to obtain a mortgage if your score is higher—and the terms will likely be better, too. Because most people have a score from each of the big three credit agencies—Equifax, Experian, and TransUnion—lenders often pull a “tri-merge” credit report that contains scores from all three agencies. If all three credit scores are usable, the middle score is what’s called the “representative” score, or the one that’s used. If only two scores are usable, the lower one is used.
You can get preliminary information on where you stand for free. Each year, you are entitled to one free credit report from each of the big three credit agencies. Getting a free credit score is more difficult, but you can get your credit score from a bank, some of which are increasingly making them available, or from websites that offer truly free credit scores.