June 17, 2013
Credit scoring is a method by which many lenders rank, or rate, the applicants for a home loan.
By analysing data gathered over many years – lenders have derived their own methodology for predicting the characteristics of a person that would be a higher risk of defaulting on a home loan.
Lenders apply this methodology to filter out the applicants they feel could potentially be a higher risk. These methodologies are a closely held secret by the lenders that use credit scoring, and only those in the risk management divisions would be privy to the credit scoring parameters. And each lender that uses credit scoring would have its own set of credit scoring criteria.
A credit score is typically a score out of 1,200 and anything above 800 is considered to be acceptable. Credit scores less than 800 can complicate your chances of getting a home loan.
Below are the key criteria that you would normally expect to be included in a lenders credit scoring:
1. Your financial conduct over the past 5 to 7 years. A lender will review your credit file. In particular, they will be looking to see if you have any credit defaults. Credit providers will place a default on your credit file if you fail to make your payments on time and work with them to resolve any outstanding payment issues. These are to be avoided at all costs, as a credit default is any alarm bell to any future credit providers. Late payments on credit card statements and utility bills can also lower your credit score.
2. Your net asset position. When applying for a loan, you will need to detail your net asset position. A lender will expect you to have a certain net asset position that correlates to your age. There can be good reasons whilst a person’s net assets are relatively low – such as divorce – but it is advisable that these reasons be explained clearly in the notes that are submitted with the application.
3. The number of times you have applied for credit. Every time you apply for credit it is logged on your credit file. Too many applications for credit can be a flag to a future credit provider that this person is losing control of their finances, and may have cash flow problems.
4. Stability of employment and residency. Lenders score applicants higher that have a stable employment history and do not relocate very often. When applying for a loan you will have disclose your most recent 3 years employment and place of residency.
5. Loan to value ratio. The higher the loan to value ratio, the more the lender will weight your credit scores. Lenders will typically rely less on the credit scores for a loan to value ratio of 50%, than they would for one of 95% where their risk is higher.
You can access your credit file via the website www.mycreditfile.com.au
Contact me today on 0414 259 699 for clarification on any of the above.