Demystifying the Mortgage Process for Kiwi Home Buyers
Applying for a mortgage can be overwhelming – that is why many homebuyers utilise mortgage brokers or NZHL Mortgage Mentors – experts who liaise between borrowers and lenders. These professionals help find the right loan for your needs and guide you through the application and approval process.
As part of the pre-approval process, mortgage brokers conduct an initial credit check. In this guide, we will look at:
- What is a credit check?
- Why do mortgage brokers perform credit checks?
- What to expect from the credit check process
- Understanding your credit score.
What is a Credit Check?
A credit check is a snapshot of your financial health outlining your borrowing history, credit inquiries, and any defaults or missed payments – useful information for potential lenders.
While a credit check can impact your credit score, a mortgage broker can do a soft check to gauge your loan eligibility without affecting your credit score.
As standard procedure, banks and other financial institutions perform thorough credit checks once you have submitted a formal application.
New Zealand has three (main) credit reporting agencies: Equifax, Illion, and Centrix. Each holds your credit report, and you can access your credit report from each agency for free annually. You can review your report for errors or inconsistencies and dispute them if necessary.
Why do Mortgage Brokers Perform Credit Checks?
The information provided in a credit check is crucial to:
Assess borrower risk:
Lenders need to evaluate the risk of lending you money. Your credit report provides valuable insights into your repayment history, financial responsibility, and ability to repay your loan.
Tailor loan options:
Based on your credit score and report, the broker can recommend suitable loan types with competitive interest rates and terms.
Negotiate with lenders:
A clear understanding of your creditworthiness empowers the broker to negotiate favourable terms on your behalf.
What to Expect During the Credit Check Process
Your experience may vary slightly – but in general, the mortgage-related credit check process follows these steps:
- Pre-approval soft check: The broker will conduct a less rigorous soft check for an initial assessment.
- Formal application full check: Once you have selected your preferred lender and loan type, you’ll apply, triggering a detailed credit check.
- Credit report review: The lenders analyse your credit report to assess your financial history and risk profile.
- Credit score impact: The detailed check will slightly impact your credit score, but the impact is temporary and usually recovers quickly.
Understanding Your Credit Score
In New Zealand, we use a credit scoring system that goes from 0 to 1,000. A higher score indicates better “creditworthiness”. In practice, a score above 700 signifies good credit, with anything below 600 seen as a concern to potential lenders.
Knowing your score before pursuing a mortgage can help you set realistic expectations about potential lending options.
If your score could use a boost, don’t worry – there are ways to build better credit – by consistently paying bills on time, maintaining a low credit card balance, and addressing errors on your credit report.
Limiting your credit inquiries can help, as applying for multiple loans (in a short period) can lower your score.
The Bottom Line
A credit check will be part of your mortgage approval process. It can be nerve-wracking but it’s important to remember that even with a less-than-ideal credit score, homeownership can still be achievable. NZHL Mortgage Mentors can guide you through the process and help you create a more appealing borrowing profile through a higher deposit or guarantor.
By understanding the role of your credit score in the mortgage process, you’ll be able to take proactive steps to improve your financial health and make your dream of owning a home a reality.