Rate shopping could railroad your loan application
Shopping around for a better mortgage rate affects your credit score – and your ability to get a mortgage.
20 Nov 2015
It’s human nature to want to search out the best possible deal. We’re all bargain hunters deep down, we love it when we get discounts, or cheaper rates, or find a deal that will leave more money in our back pocket at the end of the day.
It’ll be no surprise that when searching for a home loan, most home buyers apply the same theory. Home buyers want to get a better understanding of the rates available and then choose to go with the provider that best suits their individual needs, so they shop around.
Unfortunately many home buyers don’t realise that shopping around and applying for multiple loans with different lenders could negatively affect their credit score. This might have significant implications for the success, or otherwise, of their loan application.
As a general rule, the more money home buyers wish to borrow as a proportion of the total value of the purchase property, the more focus is put on their credit score, particularly if they’re looking to borrow more than 80%. Further, most lenders will require any loans above 80% of the value of a property to be mortgage insured and this is where some applicants fall short.
Lenders Mortgage Insurance (LMI) is designed to protect the lender against any default in payments. It’s a one-off payment that varies in size depending on the size of the loan. Mortgage insurers use detailed credit scoring when assessing an insurance application and generally frown on applicants who have made multiple applications in a short time frame. The assumption is they’ve made multiple applications because they were rejected by the last provider, not because they were shopping around to get the best rate. Unfortunately, with many lenders - if the home buyer can’t get LMI, they can’t get the loan.
Credit scores are calculated using complex mathematical formulas and algorithms. They assess an individual’s loan application data against historical data to create a score card. For most lenders the process can be quite black and white and there are no ways around it if the home buyer doesn’t achieve the desired score.
If you’ve already made the mistake of shopping around and are now struggling to get finance, thankfully there are lenders like Liberty that will look past your credit score and consider the broader story to your application.
For home buyers about to start their journey – avoid making applications with multiple providers. Instead, do your research by talking to customer services representatives, reviewing financial comparison websites, or even talking with your broker. Another great way to get loan insights quickly is to use Liberty’s Loan Insight Tool. This not only gives an indication of your interest rate based on personal circumstances, but will give an indicative pre-approval - all without affecting your credit score.