What credit score do I need to get a mortgage?

If you’re just starting the home-buying process, you’ve probably read stories about just how much your credit score can influence your ability to get a mortgage. While it’s true that you need a good credit score for the best interest rates and loan terms, less-than-perfect credit doesn’t have to be a roadblock in your journey to owning a home.

By knowing the ins and outs of how your score can affect your mortgage rate, you can build and improve your credit before you apply.

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What credit score do you need to buy a house?

There’s no magic number, but all credit scores sit within a range, such as “excellent” or “fair”. We’ve shown these ranges below. You’re much more likely to be approved for a mortgage if you have a credit score that is “good” or “excellent”. If your credit rating is “fair”, you should also be eligible for a mortgage provided the rest of your application is up to scratch.

However, if you have a “poor” or “very poor” credit score, you may find it difficult to get approved by a mortgage lender or will only be offered a loan with an extremely high interest rate and unfavourable terms.

Of course, your credit score is only one of the factors considered by lenders and even a perfect credit score can’t guarantee that you’ll be approved for a mortgage. If you don’t have a large enough deposit or are asking to borrow too large an amount, you’re unlikely to be approved regardless of your credit score.

The wider lending climate can also impact your chances of getting a loan. For example, lenders may be less likely to approve large mortgages during times of economic uncertainty, even if your credit score and overall application would likely be approved in more stable times.

How your credit rating affects your mortgage rate

Your credit score is among the more important factors a lender considers before deciding whether to approve you for a mortgage, but it’s not the only factor. They’ll also consider the following when assessing your application:

• Your debt-to-income ratio
• Your savings
• The size of your deposit

Beyond helping to determine whether you’ll be able to get a mortgage, your credit score also plays a large role in the interest rate and payment terms you’ll ultimately be approved for. If your credit score is below average, lenders may factor in risk-based pricing when quoting your mortgage, when means you could end up paying more.

To offset the perceived risk of taking on a borrower with a low credit score, a lender may also increase the interest rate on a mortgage. For example, if you have an Experian credit score of 750, you might get a higher interest rate than someone with a credit score of 900, which could cost you tens of thousands more over the life of your mortgage.

What’s the lowest score you can have without affecting your eligibility for a mortgage?

If your score is in the zone of “poor” or “very poor”, then getting a parent, spouse or someone else with better credit to act as a guarantor for your loan could improve your chances of approval for a traditional mortgage. Otherwise, you may need to work on improving your credit before applying for a mortgage.

What interest rate can you expect with your credit score?

Credit scores are broken down into categories that can help you gauge the quality of your creditworthiness and how far you must go to improve it:

• Very poor. You’re unlikely to be approved for a mortgage with a “very poor” credit rating. Instead, you should spend some time improving your score before applying.
• Poor. Unless you have a guarantor or an underwriter is willing to make an exception, it’s not likely you’ll find mortgage approval with a poor credit score. If you do find a lender willing to take you on, expect a high interest rate on your loan.
• Fair. You should be able to qualify for a loan with a fair score, but your interest rates will likely be high – sometimes significantly more so than with a good or very good score.
• Good. Your credit score may affect your interest rate, but typically not by much. You should expect to get rates close to the APR (the rate that most people get).
• Excellent. Your credit score will likely help you get the lowest interest rates and the best payment terms the market allows.

Should you check your credit report and score before looking for houses?

Yes, it’s definitely a good idea to check your credit report and credit rating before you apply for a mortgage. With your credit report and score in hand, you can:

• Correct any inaccurate information or errors in your report before you apply
• Anticipate your likelihood of approval as well as your interest rate
• See where you can improve your overall creditworthiness before buying

How to improve your score before applying for a mortgage

If your credit isn’t where you’d like it to be to get you access to the lowest interest rates and best terms, there are a few tactics you can use to improve it before you apply for a mortgage:

• Monitor your credit report. Keeping a close eye on your credit helps you more easily and quickly spot errors and gauge whether you’re heading in the right direction.
• Save up for a large down payment. If your credit score is less than perfect, putting more money down can trim your loan amount, ultimately saving you unnecessary interest.
• Hold off on other credit. Each time a potential lender runs your credit report, your credit score dips. Wait until your mortgage is approved before applying for your next credit card or loan.
• Lower your credit utilisation ratio. Pay off as much debt as you can to lower your debt-to-income ratio and ultimately improve your score.
• Pay your bills on time. To assure future creditors that you’ll repay what you borrow, build a history of on-time payments.
• Hire a credit repair service. If you’re feeling stuck, call in professionals to get back on your feet.

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Simply Adverse

Simply Adverse is a national mortgage broker specialising in sourcing mortgages for people with bad credit.

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