What role does my credit score play in mortgage application?

Buying a new real estate is hard work in itself and requires financial preparation. There are many steps involved in obtaining a home loan from collecting all the right documents, talking to the mortgage broker, and filling out the application form, all while hunting for the perfect home.

Before you move ahead with all those tasks, one aspect to consider in the process is how your credit score plays a vital role on your chances of successfully applying for a mortgage. Studies have revealed that a vast amount of Kiwis have less than enough knowledge of how their credit score is one crucial factor that impacts their chances of securing a home loan.

For most people, a home loan is the biggest form of a mortgage they will ever get. With it being of such importance, the mortgage lender’s main concern is to find out whether you are capable of paying the debt back. Most lenders will take credit score into consideration in addition to other factors like income, occupation, and age when evaluating your home loan application.

It is important to understand the effect of credit score for borrowers, as the chances of missing out on a better deal can potentially lead to losing thousands of dollars on higher interest rates, or worse getting an outright denial for a mortgage application.

Understanding credit score:

A credit score is a tool that helps lenders find out whether you qualify for a particular mortgage, service, or credit card. It is a numerical representation of a borrower’s creditworthiness or reliability. It shows the lender how well the potential borrower has been managing their finances, including their ability to make mortgage repayments. The score generally ranges from 0 to 1000, from 1000 being the highest score to 0 being the lowest. According to Centrix, one of the main credit reporting agencies in New Zealand, a low credit score ranges from 0 to 494, a fair score ranges from 495 to 695, a good score from 650 to 768, a very good score from 769 to 845, and lastly the highest and excellent score falls between 846 to 1000.

If an applicant falls in between the low and fair range, the lender will proceed with the application with some caution. Some lenders may be willing to grant a loan but may do so at a higher interest than others as the risks involved for them is more.

With the applicants that are anywhere between the good to very good range, the chances of approval on the application are positive. This is also the average credit score of residents in New Zealand.

For the scores that fall within the excellent range, the risk involved for lenders is considered very low with the highest chance of easy loan approval. Lenders are content with applicants of this score and may even offer them better loan options.

The credit score contributes as a vital part of the financial products you take out throughout your life. To ensure that your score stays over the acceptable limit, it is important to understand various factors that can affect and change it.

  • Monthly repayment history: These repayments include everything from finance, credit card, car loans, hire purchases, insurance, student loans to any other form of credit or loan. They also include payment history of daily expenses such as phone, gas, energy, and electricity bills. Any late or overdue payments will most likely have a negative effect on the score, if there are more than one it can have a substantial impact on the score.
  • The duration of one’s line of credit, as well as their newest and oldest accounts and the history of how active these accounts have been.
  • Any new account that has been opened recently.
  • Court notices and judgments under the applicants, in regard to Non-Asset Procedures (NAP), outstanding debts, bankruptcies, and Summary Instalment orders (SIO).
  • The amount of available credit being used and total debts.
  • Your employment history.
  • The number of hard credit searches on the credit report, which appear when one actively makes an application for a new credit or loan. Every time an application is submitted, it leaves a footprint on the credit file which lenders use to make the decision on whether to grant your mortgage.

There are many ways one can improve their credit score. One of the easiest ways to ensure a good score is by making all repayments on time and closing any overdraft credit accounts.

Although having a good credit score is important, a bad credit does not necessarily mean that your goal of owning a property is over. We have worked with clients from all walks of life, reach out to us today if you dream of owning a house, and we can advise and help you find the right mortgage solution for your unique requirements.

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