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Avoid credit shopping to improve home loan chances

17/03/2011

While many Australians have high levels of personal and credit card debt, those looking to borrow to buy a home in the near future are advised to jump off the consumption bandwagon by a leading mortgage advisory group.

According to Smartline Personal Mortgage Advisers, not only can current personal debt levels have a significant impact on your ability to secure a loan, but “shopping” for credit – that is making numerous applications for credit – or accepting those unsolicited credit card offers in the mail can be detrimental to your chances of being approved for a home loan.

Every dollar of both existing and potential credit card or store card debt is a black mark against your name in a still fairly tight home loan market, says Smartline Managing Director Chris Acret.

These credit applications are taken into account when determining your credit score and credit scoring is increasingly being used by lenders to approve or decline mortgage applications. 

“Credit scoring is quite a big issue,” Mr Acret said.

“Lenders are becoming increasingly sensitive about the number of applications people make for credit.

“All of these applications show up on your credit file and lenders worry that your debt burden will impact on your ability to make your home loan repayments.

“Most lenders now use automated ‘credit scoring’ which consist of very complex algorithms. While there is no information available on how exactly these scores are calculated, we find that the number of recent credit enquiries can be one of the most significant factors in the applicant’s credit ‘score’ being deemed to be unacceptable.

“It is our experience that several credit applications or enquiries in the space of the last year will score poorly with many lenders, and can lead to the application being instantly declined.

“Unfortunately, most lenders will then not consider overturning this ‘computer says no’ response. Once the damage is done, it is simply too late.

“Lenders want to see that people are responsible with credit and are not loading up on debt.”

Careful management of credit is particularly important for first home buyers who have been particularly impacted by the tightening of the home loan market as a result of the GFC.

While it can take years for borrowers to build a strong net asset position or a lengthy employment history, keeping a low level of activity on a credit record is one way a younger borrower can maximise their chances of securing a home loan.

“If you’re planning to apply for a home loan, even in the future, it can be a good idea to cancel all credit cards you don’t need, or at least reduce the limit to a manageable level on the ones you wish to keep,” Mr Acret said.

“When most lenders assess your ability to repay a mortgage, they assume that your credit card will be, or could be, fully drawn to its limit.” 

This can forge good practices – not least when it comes to being a mortgage-holder.

Once in a new home, having sensible credit limits minimises the temptation to buy a new lounge suite or plasma TV on credit.

This way, Mr Acret says, young home buyers can concentrate first on reducing their home loan and then getting ahead, particularly if there are further interest rate rises – as some predict for later in the year.

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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