Is Your Credit Killing Your Chances of Getting a Home Loan?
By Peter Sarmas on 3 Oct 2013
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For those of you who haven’t yet entered the property market, you may not realise how pivotal your credit rating is in obtaining the home loan you want.
It can be surpisingly easy to bring down your credit rating with minor occurrences.
Whether you are planning to apply for your first mortgage in a few years’ time, or you are considering refinancing in the near future, a strong credit rating is absolutely crucial in defining your borrowing power.
Credit Reporting Agencies Explained
All credit providers, including banking, finance telecommunications, retail, utilities, credit unions and mortgage lenders, subscribe to consumer credit reporting agencies in order to conduct thorough credit history checks on potential borrowers.
“Your score is the first thing your lender will look at when considering granting you credit.”
In Australia, the three main agencies are Veda Advantage, Dun and Bradstreet and the Tasmanian Collection Service.
Depending on your credit history, these agencies will give you a score which they will then pass onto the credit provider. This score will become your credit rating. The scores range from -200 at the lowest to 1200 at the highest.
Your score is the first thing your lender will look at when considering granting you credit.
How You Can Wreck your Credit Rating
Defaulting on an agreed upon payment schedule is the single worst thing you can do for your credit rating.
To credit reporting agencies and lenders alike, defaults are thought of very poorly, and they set a precent for your future borrowing behaviour. A default on a payment over the sum of $500 will greatly affect your likelihood of gaining approval for a home loan, and can drop your rating by 100 points.
Avoid this at all costs – think carefully about what you can afford before your make commitments, and if you find yourself in trouble, talk to your lender and discuss payment extensions before it is too late.
How This Can Affect Your Home Loan Application
Late payments and forgetting to make payments can make a big difference in securing your most desired future home loan – this is one of the traps that many Australians fall into as many people are unaware of how seriously credit reporting agencies take this matter.
Although occasional late payments aren’t looked on as harshly as they used to be, provided you usually demonstrate consistent on time payments, regularly repaying your lenders late can have a drastic impact on your credit rating.
Each late payment is noted, and demonstrates a sense of irresponsibility on your behalf. If you owe more than $100 and fail to make a payment for at least 60 days, it can be listed in your records for up to five years.
“Unpaid mobile phone bills are one of the most frequent traps Australians fall into.”
Unpaid mobile phone bills are one of the most frequent traps Australians fall into, and can have a really bad impact on your credit rating, affecting your chance of getting the home loan you want.
Formal enquiries and new debt have the ability to lower your credit rating by up to 10 per cent. When shopping around for a mortgage, you have a 30 day window in which all formal credit enquiries you make will be counted as one.
When looking for a car loan the period which enquiries will be counted as one is reduced to 14 days, so keep loan applications to a minimum.
While new debt won’t affect your chances of getting a home loan on its own, it compounds with other factors and could be the thing that brings down your score just enough to tip the scales in favour of refusing your application, so take care of your credit score, because you never know when you’ll be applying for a home loan.
Here are two sources where you can get your free credit report:
Veda
Dun & Bradstreet
The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should seek your own independent advice, having regard to the appropriateness, your objectives, financial situation and needs.
If you are thinking of buying selling or investing and would like a FREE 5 minute chat
with Street News Director Peter Sarmas, please contact him on 0418 740 606
or via email at [email protected]
