It's unlikely that you'll be paying for your first home upfront. Like most Kiwis, you'll probably need to take out a loan — and if you want a suitable mortgage, you're going to need a good credit score.
Here, we'll tell you why it's essential to have a good credit score when buying a house and let you know how to check your score using the Yonda app.
Why does my credit score matter?
Your credit score tells potential lenders how likely you will repay a loan, and it's what they use to see if you're a safe bet when they give you money. After all, if you're giving someone money, you want to make sure you get it back. This means if you have a poor credit score, you might get rejected for loan applications.
Low scores affect more than just your loan approval. Your score also determines the interest rate you'll be charged, which affects how much you pay back over time.
For instance, if you've got bad credit and were offered a loan, your lender might charge you a higher interest rate to make up for the risk that you might not be able to pay it back. That means you could end up paying hundreds or thousands more over time.
So what's the minimum credit score I need to get a mortgage?
Unfortunately, it's not that simple.
There's no one specific credit score required to buy a house. Every lender has different information they're looking out for when you make your application. When considering your loan application, your credit score is part of a much larger picture. Other things like your salary, the amount of money you currently have, the evaluation of the property you're thinking, etc., all get considered as well.
So, unfortunately, a good credit score doesn't guarantee your approval. But that also means a bad credit score doesn't indicate that you have no hope of getting a loan.
So my credit score doesn't matter?
It does matter. Credit scores are a significant factor in the overall loan 'puzzle' — take them out, and lenders won't make a full report on you, which makes them reconsider lending you anything. There are lots of other benefits too, which we cover in other blogs.
So what affects my credit rating?
Numerous factors determine your credit score. The critical thing to remember is that scores represent your borrowing behaviour — so your history of borrowing money and paying it back has a significant impact.
But other things come into play too. How much money have you borrowed? How often do you take out loans? Even the number of credit enquiries made on you can affect your score. A high number of enquiries suggests you've been on the lookout for lots of different loans, which makes lenders think that you'd be risky as a borrower.
Lenders will often look at your current income, spending habits (for instance, what your rent is), your employment history, address history and even your age when it comes to working out whether they think you've got good credit or not.
It's not all negative. Do you repay your bills consistently and on time? Evidence of healthy and consistent repayment patterns can make your score go up. Having a low credit score may also restrict the kind of loans you're eligible to receive.
A tip — take a few years to be smart with your money. If you make all your repayments on time, your credit score is likely to climb to the point where you could refinance your home loan with a loan that has a lower interest rate.
My home loan application has been denied. Now, what do I do?
Your application for a home loan was unsuccessful? Don't worry; you're not out of options.
You could take a few months to work on your credit score, carefully budget your money and make sure you're hitting all those repayment deadlines while avoiding taking out any new loans. Then it's time to try again and see if those careful steps have made a difference.
If you're in the market to buy a house, making sure you have a good credit rating should be right up there with securing a mortgage. There's no set minimum rating you need — but the higher, the better.
To nail down that low-interest rate, you should be looking at your borrowing behaviour, current income, spending habits and employment history. If your credit history isn't the greatest, it's time to start budgeting and paying those loans back.