Can you get a home loan with no credit history?

• How to check your credit score
• What makes a good credit score
• Can you get a home loan with no credit history?
• How to improve your credit score

When you’re trying to sort out your finances in preparation for buying a home in Aotearoa New Zealand, you’ll soon find there are many ducks to get in a row.

One of the things that might not immediately spring to mind, but that should absolutely be on your to do list, is assessing your credit score. Your credit score can have a substantial impact on your ability to get pre-approval for a home loan, so it’s important that it’s in good shape.

Not everyone has a credit history at all, good or bad. If you have recently moved home from overseas, or if you haven’t previously taken out loans or credit lines, held a postpaid phone plan or an account with a utility provider, you might be in this camp. Even if you have previously applied for credit, but it’s been over five years, these enquiries may have been wiped from your record after five years.

Not having a credit history can hurt your chances of being pre-approved for a home loan. This is because checking your credit history is an important step that lenders take in assessing how risky you are as a proposition to lend to. Therefore, if they can’t check this, it might raise a red flag in their minds.

It is still possible to get a home loan without a credit history, but you might expect to pay more in interest rates on the loan, or potentially the lender might loan you a smaller amount than you were hoping for.

If you don’t yet have a credit history of any sort, there are some easy steps you can take to start building it up:

• Putting utility accounts that you pay into your own name – think gas, water and electricity.
• Taking out a postpaid phone plan in your name.
• Taking out a gym membership.
• Using a credit card (but crucially making the repayments on time)

Building out your credit history will provide a clearer picture of your behaviour to prospective lenders. Imperatively, with all of the above examples, you need to make sure you make those payments on time. There’s no point in creating a credit history if it’s a bad one – you want to show lenders that you’re responsible and reliable when it comes to managing your finances.

We highly recommend that you check where your credit score is currently sitting. There are three services that allow you to do this:

• Equifax
• Ilion
• Centrix

All of these are free to use, but some require registration in order to use. Both Crentix and Equifax also take a wee while in order for your credit score to arrive (usually 5 - 10 days).

But what makes a good credit score? Ideally, you want a credit score of 500 or more (out of a possible 1000). The lower the score you have, the more risk lenders will see in loaning you money to help you buy a house. By contrast, the higher credit score you have the more likely you are to be able to borrow a greater amount of money from a lender.

It is possible to get a home loan with a lower credit score (although if it’s below 300 you’ll likely struggle), however, you might find that the bank is only going to loan you a small amount, or they might charge a higher interest rate.

This one goes hand in glove with the above. The best way to avoid getting into debt is by making sure you pay your bills on time. Ideally, you’ll pay bills before the due date, though on the day works as well. Being able to show a track record of consistently paying bills on time will do wonders for your credit rating.

You risk lowering your credit score by applying for a credit card or taking out a new line of credit. Even using a Buy Now Pay Later service can be problematic. So, in the run up to seeking a big loan, like for a house, you want to minimise (and ideally eliminate) requesting any other credit.

With credit cards, it doesn’t only matter how much you have on the card, but also how much of the available credit is being used. For example, if you have $500 on a credit card with a $2,000 limit, you’re using 25% of the available credit, or your debt-to-credit ratio is 25%.

Unsurprisingly, it’s a case of the lower the better when it comes to this ratio.

The best way to do this is to look to lower both your debt levels and your credit levels. While it might be tempting, in the above example, to simply raise your credit card limit to $5,000 (to make the $500 in use only represent 10% rather than 25%), some lenders will see an increased credit card limit as a possible debt, and thus reduce your ability to borrow.

Pay off what you can of your credit card balance as often as possible. Even if you can’t clear the whole balance right now, keeping it as low as possible is a great way to improve your credit score.

Showing that you can manage different types of credit simultaneously can help boost your credit score. For example, this might include handling a credit card, postpaid mobile phone plan and a car loan at the same time. Of course, you’d need to ensure you can make the repayments on all of these for this to be beneficial rather than harmful, and you’ll want to balance this out with the 3rd point about not taking out more lines of credit.