What credit score do you need for a home loan?

When applying for a home loan in Australia, your credit score plays a crucial role in determining whether you’ll be approved and what kind of terms you’ll be offered. While a credit score isn’t the only factor considered by lenders, it serves as a snapshot of your financial reliability and borrowing habits. Understanding the importance of a credit score and knowing what range is typically high enough for home loan approval can help you better prepare for the application process. In this article, we'll explain how credit scores are calculated, why they matter, and what score range is typically required to secure a home loan in Australia.

What is a Credit Score?

A credit score is a numerical expression of your creditworthiness based on a range of factors, including your borrowing history, repayment behaviour, and any outstanding debt. In Australia, credit scores typically range between 0 and 1,200 or 0 and 1,000, depending on the credit reporting body. The three major credit bureaus in Australia are Equifax, Experian, and Illion, and each calculates credit scores slightly differently, as shown in the table below.

Your credit score reflects your history with loans, credit cards, and other financial products. The higher your score, the more likely it is that lenders will view you as a responsible borrower. Lower scores indicate a higher risk to lenders. Several factors affect your credit score, including your repayment history, how many credit applications you’ve made, and whether you’ve defaulted on any loans. Monitoring your credit score and ensuring its accuracy is crucial for securing a home loan.

What Credit Score Do You Need for a Home Loan? 

In Australia, credit scores are typically categorised into five ranges: excellent, very good, average, fair, and low. For most lenders, a credit score between 600 and 700 is considered good enough for a home loan, though the exact threshold may vary between institutions. A score above 700 is generally seen as very good to excellent, giving you the best chances of securing a home loan with competitive terms and interest rates.

Previously, banks and other lenders have commonly required a credit score of around 620 or higher for home loan applications. However, as lending criteria have evolved, some lenders may be willing to offer loans to those with slightly lower scores, though they may require a larger deposit or impose higher interest rates to compensate for the risk.

Different lenders have their own thresholds for what they consider to be a good credit score, and many offer specialist loans for those with lower credit scores, but these may come with additional fees. It's always worth comparing lenders to see who offers the best deals based on your specific score. If your score falls into the average range, there may still be options available to you, though at a higher cost.

How to Check and Improve Your Credit Score

If you’re planning to apply for a home loan, checking your credit score before submitting your application is a crucial first step. You’re entitled to request a free copy of your credit report from Australia’s major credit bureaus—Equifax, Experian, and illion—once a year. This gives you an opportunity to review your score and check for any errors that may be dragging it down.

Improving your credit score takes time, but there are some key steps you can take to boost it. Paying bills on time is one of the most effective ways to improve your score, as consistent, timely payments show lenders that you’re a responsible borrower. Additionally, reducing any outstanding debts, such as credit card balances, can also have a positive impact. Avoid applying for multiple credit accounts in a short period, as frequent credit inquiries can hurt your score. Staying informed about your score and making incremental improvements will help ensure you’re in the best possible position when applying for a home loan.

What Happens if You Have a Low Credit Score?

If you have a lower credit score, you may still be able to obtain a home loan, though the process can be more challenging. Many specialist lenders in Australia offer loans to people with lower credit scores, often referred to as "non-conforming" or "subprime" loans. However, these loans typically come with higher interest rates and fees to compensate for the additional risk the lender is taking on.

One option for those with a lower credit score is to apply for a guarantor loan. In this situation, a family member, often a parent, agrees to guarantee the loan, meaning they’ll be responsible for making repayments if you default. Having a guarantor can make you less risky in the eyes of lenders and improve your chances of getting approved, even with a low score. Additionally, taking steps to improve your credit score before applying or waiting to apply until your score improves could save you thousands in the long run. Speak to a top mortgage broker to find out how they can help you get a home loan despite your low credit score.

Why Credit Score Matters for a Home Loan

Lenders in Australia rely heavily on credit scores to assess the risk of lending money to a borrower. A higher credit score suggests a lower risk, meaning you’re more likely to be approved for a home loan with favourable interest rates. Conversely, a low credit score can make it harder to get approved, and if you do qualify, you may be charged a higher interest rate to offset the perceived risk.

Having a strong credit score gives you more negotiating power, whether that’s for a lower interest rate or more flexible loan terms. Additionally, lenders may offer larger loan amounts to individuals with higher scores since they are seen as less likely to default on their payments. If your credit score is low, you may still qualify for a loan, but the terms are likely to be less favourable, which could cost you significantly more over the life of the loan.

What Other Factors Affect Home Loan Approval?

While your credit score is an important factor in determining whether you’ll be approved for a home loan, it’s not the only consideration. Lenders also look at other financial metrics, including your income, employment history, savings, and overall debt levels. A steady job and a good savings record are both favorable in the eyes of lenders, as they indicate financial stability.

The loan-to-value ratio (LVR) is another critical element lenders consider. This ratio compares the loan amount to the value of the property you’re buying, and the higher the LVR, the greater the risk to the lender. Typically, a lower LVR (such as having a 20% deposit) will give you a better chance of loan approval, even if your credit score isn’t perfect. Managing all these factors alongside your credit score increases your chances of approval.

Conclusion

In Australia, having a good credit score is crucial for securing a home loan with favourable terms. While each lender has slightly different requirements, a credit score of 600 or higher is generally enough to secure a home loan. Beyond your credit score, factors like your income, employment history, and loan-to-value ratio also influence a lender’s decision.

By checking and improving your credit score ahead of time, you’ll be in a better position to secure a home loan at a competitive interest rate. Even if your score isn’t ideal, there are still options available, including specialist loans and guarantor loans. Overall, staying informed and managing your credit wisely can help you achieve your goal of homeownership in Australia.

Need Help with Getting a Home Loan?

Using the services of a mortgage broker can help you get your home loan approved quicker. An experienced broker will be able to advise you on what documents you need, and how to find out and improve your credit score. If you have want to get started in the mortgage process, or simply have some questions, fill out the form below and Eden Emerald Mortgages will get in touch.