Getting a Home Loan with a Low Credit Score
Whenever you apply for a loan package, lenders have to make reasonable enquiries about your financial situation. They determine your credit worthiness and ability to make repayments by taking a look at your credit score. Most Prime Lenders require a credit score over 650 however there are many funders both Prime and Sub prime where you can get a Home Loan with a Low Credit Score. It is important that you know the components that make your score.
What are the Main Components of Credit Score?
Whilst the formulas for calculating scores are quite complex and secretive, its components are not a secret. To help you understand, here is a list of components along with their relevant percentage assigned to each component of your credit score:
- 35% for your “Payment history” – Late payments on bills, such as a mortgage, credit card or automobile loan, etc. will cause score to drop.
- 30% for “Credit utilisation” – The ratio of your current revolving debt (such as credit card balances) to your total available revolving credit or credit limit will determine your credit utilisation.
- 15% for Length of your credit history – The aging of your credit history can have a positive impact on your score.
- 10% for Types of credit used – You can benefit by having a history of managing different types of credit (e.g. mortgage loans, instalment loans, revolving credit, personal loans, etc.)
- 10% for Recent searches for credit – Hard credit enquiries, which occur when you apply for a credit card or home loan (revolving or otherwise), can hurt your score, especially, if done in great numbers. If you are “rate shopping” for a mortgage loan or auto loan (e.g. a fortnight or 45 days), you will likely not experience a meaningful decrease in your score as a result of the credit enquiries. As the scoring models consider all hard enquiries that occur within 14 or 45 days of each other, as only one.
What is the Impact of Credit Enquiries on your Credit Score?
While all enquiries are recorded and displayed on your personal credit reports for two years, they have no effect after the first year because most credit scoring systems ignore them after 12 months.
Some enquiries (called “soft enquiries”) are not considered by credit scoring systems and they do not have an impact on your score. Here is a list of “soft enquiries” that do not have an impact on your credit scoring:
- A report obtained by you for personal use
- A report obtained by the employer for employee verification
- A report obtained by companies initiating pre-screened offers of loan or insurance
Other Impacts on credit score include a bad credit rating
Here is a list of how you can get a bad credit rating:
- If you never had a loan or never owned a credit card because mainstream lenders cannot access any evidence to show that you can manage your borrowings successfully
- If you have a Default listed against you because you failed to keep up with your regular payments on a previous loan or finance arrangement
- If you have a Court Judgement listed against you.
Why a Low Credit Score or a Poor Credit Rating does not have to be a Stumbling Block to Getting a Home Loan?
While there are some Prime and Near Prime funders who will allow funding to 80% LVR to applicants with low credit scores. It is generally not possible to borrow from any of the mainstream lenders because your credit ratings will prevent you from fulfilling their strict lending guidelines.
However, there is a possibility that you can still get a loan. It is because there are a number of Non Conforming Lenders who specialise in providing low credit score / bad credit loans to people with a bad or a poor credit history.
Seek advice from a professionally qualified Non Conforming Lender who will put you in a better position.
When assessing your request for a mortgage the finance broker will:
- Look at your income, nature of your employment and your Loan-to-Value Ratio (LVR);
- Look at your accumulated savings and the period of your savings history;
- Look past your credit file and will discuss with you your credit blemish;
- Discuss with you the reasoning or situation that led to the listing of either a Default, Court Judgement, Part 9 Agreement or the Bankruptcy.
So, these are the components that determine your score. I sincerely hope this article increases your awareness of credit scores. Truly, having an expert finance broker on your side will save you lots of time in obtaining bad credit loan.