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Credit Score for Home Loans: Best Bank Account Practices

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Understanding the impact of credit score for home loans approval means recognising that lenders look beyond the basics of credit history, income, and savings to include the way borrowers manage their personal transaction accounts. This shift towards assessing account conduct highlights the importance of maintaining good financial habits, such as avoiding overdrafts, ensuring bills are paid on time, and keeping account balances positive. For borrowers, this means taking proactive steps to manage their finances more carefully.

What is a Good Credit Score for Home Loans

In Australia, an “Excellent” credit score ranges between 800-1,000, significantly boosting home loan approval chances. A “Very Good” score is between 700-799, while a “Good” score falls within 625-699. Scores from 550-624 are considered “Fair,” and below 549 is deemed “Weak.” Higher scores indicate lower risk to lenders, improving loan approval prospects. It’s important to note, however, that lenders consider more than just credit scores during the approval process.​

Why Account Conduct Matters

Financial institutions are mandated to lend responsibly, and part of this responsibility includes evaluating how well borrowers manage their personal finances. This evaluation extends to examining the activity within personal transaction accounts, including how borrowers handle monthly subscriptions and bills. Proper account management reflects positively on one’s financial reliability, which is crucial for loan approval.

Overdrawing Impact on Credit Score for home loans

An overdrawn account can occur when direct debits are processed without sufficient funds, leading to what’s termed as an ‘unarranged overdraft.’ While sometimes banks may cover these overdrafts temporarily, especially for accounts with consistent deposit histories, this leniency can backfire. Persistent overdrafts may signal financial irresponsibility to lenders, potentially affecting loan approval chances.

Avoiding Overdraft Fees

Overdrafts often come with fees, either as a percentage of the overdrawn amount or as fixed charges per transaction. These fees can compound the problem, making it more challenging to return the account to a positive balance. Such financial missteps, if frequent, may be reported to credit bureaus, further impacting one’s creditworthiness.

How Lenders Assess Account Conduct and Credit Score

During a loan application review, lenders will meticulously analyze the last three months of account transactions. They assess not only the borrower’s savings and income but also their spending habits and remaining funds after potential mortgage repayments. This thorough examination ensures lenders meet responsible lending obligations while confirming borrowers can sustainably manage loan repayments.

Lenders look positively at behaviours that demonstrate financial stability and responsibility. When evaluating loan applications, they consider several factors beyond just avoiding overdrafts. Here are some aspects that are seen as positive by lenders:

  1. Consistent Savings: Regular contributions to a savings account show that you can manage your finances effectively and have the discipline to set aside money consistently. This suggests to lenders that you’re likely to manage loan repayments in a similarly responsible manner.
  2. Stable Income: A stable and reliable income is crucial. Lenders look for consistency in their earnings, which reassures them that they have the means to meet their repayment obligations over time.
  3. Low Debt-to-Income Ratio: This ratio compares your total monthly debts to your gross monthly income. A lower ratio indicates that you are not overly burdened by debt and are more likely to manage additional loan payments.
  4. Timely Bill Payments: Regular, on-time payments of bills, including utilities, credit cards, and other loans, demonstrate financial reliability. A history of timely payments can positively impact your credit score, making you more attractive to lenders.
  5. Length of Credit History: A longer credit history provides more data for lenders to assess your financial behaviour. It can be beneficial, especially if it includes a mix of credit types (like credit cards, car loans, and mortgages) managed responsibly.
  6. Credit Utilization Ratio: This is the amount of credit you’re using compared to your available credit limit. Keeping your credit utilization low (generally recommended under 30%) shows that you’re not overly reliant on credit, which lenders view positively.
  7. Diverse Types of Credit: Having a mix of credit types (revolving credit like credit cards and instalment loans like auto loans) and managing them well can signal to lenders that you’re capable of handling various types of credit responsibly.

Strategies for Maintaining Good Credit Score for Home Loans

  1. Budgeting: Crafting a detailed budget that accounts for all monthly expenses is essential. This plan should include all direct debits and ensure funds are available to cover these automated payments.
  2. Direct Debit Management: If payment dates don’t align with your cash flow, contact service providers to adjust the schedule. This alignment can prevent account overdrafts and maintain a healthier account balance.
  3. Manual Payments: Consider disabling direct debits for certain bills, allowing for manual payment submissions. This approach offers greater control over the timing and amount of payments, reducing the risk of overdrafts.
  4. Regular Account Review: Periodically assess your spending habits and adjust where necessary. Identifying and addressing any recurrent issues can prevent future financial pitfalls.

Before Applying for a home loan

Ensure your financial conduct is impeccable, especially in the three months before a loan application. Avoid defaults, dishonoured payments, or overdrafts during this critical period to improve your chances of loan approval. Before applying for a home loan, enhancing your deposit size and considering financial guarantors can significantly impact your application’s success. A larger deposit reduces the loan-to-value ratio (LVR), demonstrating to lenders your ability to save and manage finances, which can lead to more favourable loan terms and interest rates. Financial guarantors can also bolster your application, especially if your savings are not substantial. Guarantors, often close family members, provide additional security to the lender by agreeing to meet your loan obligations if you cannot, reducing the lender’s risk.

Seeking Professional Advice

For those considering a home loan, consulting with a mortgage broker can provide personalised advice and assistance throughout the application process. A broker can offer insights tailored to your financial situation, helping navigate the complexities of loan approval and strategies to improve your credit score.

Final Thoughts

Maintaining good account conduct is not just about avoiding fees or overdrafts; it’s about demonstrating to lenders that you’re a responsible borrower with a good credit score for home loans. By managing your finances carefully and making informed decisions, you can improve your chances of securing a home loan on favourable terms.

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By Lauren Eakins

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