What your credit score says about your home-buying power

If you’re thinking about buying a property with the help of a home loan, the property’s asking price isn’t the only number you need to be mindful of. Your credit score (a three-digit number between 0 and 999), will go a long way towards determining whether or not your bond originator will be able to secure you a home loan. So how do credit scores work and how high does your credit score need to be? What can you do to maximise your chances of having your home loan application approved? Jawitz Properties has the answers.

How do credit scores work?

In short, your credit score is a number that gives a prospective creditor an idea of how likely you are to pay your instalments faithfully. The higher your credit score, the less risky you are perceived to lenders. According to bond originator ooba, a credit score of at least 600 will give you a fair chance of home loan approval. This isn’t a guarantee though, and each bank has its own appetite for risk and algorithms for making their decisions. It’s also important to note that various banks may have different scoring structures, although a credit score is usually a number out of 999.

The main factors that affect your credit score include payment history, length of credit history and the types of credit that you have. Any missed or late payments will hurt your credit score, while a longer history of responsible credit use will typically improve it. Having a mix of credit types (such as credit cards and retail accounts) can show the banks that you manage different forms of credit well. Any judgments against you, as well as debt counselling flags and sequestration orders will significantly damage your score.

At the same time, having no credit history is not the same as having a good credit history. The banks want to know that you have experience with debt and know how to manage it effectively.

Useful tip: You’re entitled to get at least one free credit report a year through companies like TransUnion and Experian. Your credit report will give you your current credit score as well as account information about any loans, credit cards or store accounts you may have, and adverse listings like defaults, arrears and accounts that have been handed over.

How can you increase your credit score to maximise your real chances of having your home loan application approved?

Improving your credit score takes time, so it’s well worth starting the process now, even if you’re only considering buying property a couple of years down the road. The single most important factor in your credit score is your payment history. Set up debit orders to ensure that you never miss a payment. If you’re struggling to pay, contact your creditor before the date that payment is due.

Another way to improve your credit score is to lower the amount that you owe. Pay down high-interest or maxed-out accounts first. If you have old credit accounts that you seldom use, keep them open and use them to show your creditworthiness by making small periodic purchases and paying them off promptly.

Even if your credit score is reasonably good, there are great incentives to get it even higher. An outstanding credit score could pave the way for preferential terms and interest rates on your home loan.

The benefits of knowing your credit score go beyond getting ready to buy real estate. You may discover that your credit report has incorrect information that is negatively impacting your score – and that could have an impact on any credit application that you make.

If you’re interested in learning more about applying for home loans and deciding whether or not now is the time for you to invest in property, we’re here to help. Get in touch with Jawitz Properties and let’s talk.