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What is a good credit score if you want to buy a house?

To find out your chances of securing a home loan, check your credit score. A good credit score will significantly improve the likelihood of home loan approval.

Article summary

  • Your credit score is a big number above your head that tells a potential lender how much of a risk you are.
  • Your credit score is determined by how well you manage your debt, how many accounts you have and how long you’ve had them for, among others. You can request your free credit score annually from a credit bureau.
  • A high credit score will smooth the way to a successful home loan application.

Very. High. Risk. These are just some of the four-letter words you don’t want to see when you consider your credit score before applying for a home loan. With that in mind, here are a few things you need to know about credit scores, so you can give yourself the best chance of getting your home loan approved.

What is a credit score?

As far as your bank is concerned, your credit score is a big number above your head that tells them how much of a risk you are.

Your credit score indicates to your bank whether your past debt repayment behaviour will make you a good risk or not. Through various calculations based on your transactional records, the credit bureau will provide your bank with a three-digit number ranging between 0 and 999. Naturally, the higher the better, and a high credit score rating is one of the most valuable personal finance assets you can have.

What would be considered a good credit score?

  • A score of 600+ will give you a fair chance of home loan approval, although this may vary according to which bank you use.
  • A score of 670+ is considered an excellent credit score, significantly boosting your chances of home loan approval.
  • Scores below 600 would be considered high to very high risk. In this case you’ll want to look at ways to clear your credit record.

Each bank uses both the credit bureau score and their own internal risk assessment criteria which looks at a number of factors specific to a particular home loan application, such as the loan size compared to the property value (zero deposit is considered higher risk).
If you are classified as very high risk, the chances are you won’t be successful in your home loan application as the banks will question your ability to pay them back.
A good to excellent credit score will have the opposite effect, possibly opening the way for you to negotiate preferential terms and interest rates.

How to find out your credit score

The credit bureau allows you to check your credit score once a year, at no cost.

How is a credit score calculated?

Credit bureaus will compile a record of your personal credit transactions and rate your debt repayment performance according to a credit score chart that indicates how well (or not) you manage your debt.

Credit bureaus look at the following factors when calculating your credit record:

  • Your debt repayment history.
  • Amounts owed.
  • Types of credit applied for and how often.
  • How long your accounts have been open.
  • How much of your available credit you’re using.
  • Whether there is any history of you not honouring a debt obligation that resulted in bankruptcy or a judgment against you.

The credit bureaus won’t only be looking at your repayments history. They’ll be able to access your employment history and income as well and calculate your credit score according to a complex formula.

Tips for improving your credit score

Any improvement in your credit score can only work in your favour. It’s relatively easy to achieve once you put your mind to it and exercise a little discipline in managing your finances.

10 tips on how to get a good credit score

  1. Make sure you don’t apply for more than one loan at a time because that will signal lenders that your financial status has deteriorated.
  2. Always pay your accounts in full and on time. Try and pay more than just the minimum instalment.
  3. Try to stay out of the red. So keep servicing your debt, only dipping into available credit when you really need to and reduce your credit limits where possible.  Avoid spending up to your credit limit.
  4. As much as we don’t like to be in debt, having accounts is a must when it comes to applying for a home loan. Without them, the credit bureaus won’t be able to assess the risk associated with your application.
  5. It’s a good idea to get your credit card debt down first and keep the balances low because credit cards often carry the highest interest rates.
  6. Avoid owing more than a third of your gross income on debt.
  7. Close accounts when you’ve paid the balance owing. This will count in your favour as it will indicate that you are a lower risk.
  8. Revolving credit is a bad idea and also usually carries high interest rates.
  9. Remember that as much as you need to manage your own accounts, those of your spouse will also need to be in good shape if you’re applying for a home loan. The banks will want to know about their credit history too.
  10. If you’re unable to pay the amounts due on your accounts in full, make an arrangement with the creditors to pay lower instalments over an extended period of time.

Don’t lose hope if you do have an application rejected by your bank, as evo can apply to multiple banks on your behalf, and have been successful in securing home loan financing for two in every three applications that are initially turned down by their bank.

If you are just thinking about buying a home, or are ready to put in an offer, evo gets you the best deal on your home loan – for free. To make the home-buying process that much easier, evo also offers a range of home loan calculators to help make the home-buying process easier. Get prequalified for a home loan with evo, then, when you’re ready, you can apply for a home loan with evo.