I am currently in Australia and fixing to buy a house here. What is given more value when I apply for a mortgage to buy a unit in an apartment: a sound credit history, or a lot of savings in the bank ?

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    Is the money in the bank going to a higher downpayment or do you mean it as proof of your character? – JTP - Apologise to Monica Mar 9 '14 at 23:50
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    @JoeTaxpayer As a proof of character. Or as a yardstick that is used when gauging my eligibility/rate of interest. To draw a parallel - what is more inline with a (USA) credit score kind of thing - credit/repayment history or savings in the account? – happybuddha Mar 9 '14 at 23:57

In Australia, banks use 3 main criteria to assess your mortgage application.

  1. Your Credit History - they will generally knock back an application if the applicant has a history of defaulting on loans and other payments. You would pose too high of a risk.
  2. Your current Net Income (after tax) - used to assess whether you are able to make the monthly mortgage repayments. If you are getting rental income the banks will only count about 75% of your net rent to allow for when the property is vacant (between tenants).
  3. Your Equity in the property - generally to avoid paying LMI (Loan Mortgage Insurance) you would need a minimum of 20% of your own funds as a down-payment/deposit so that the LVR (Loan to Value Ratio) is not more that 80%. If you are going for a Low Doc Loan (where you only have to sign a Statutory Declaration regarding your income and not provide the supporting documentation to prove it) you will generally require a maximum LVR of 60% (i.e. 40% down-payment/deposit).

Please Note: In some areas where there has been an over supply of apartments built, the bank might require you to have a lower LVR, closer to 60%, where you are buying a unit in such an area.

So as long as you have an ok credit history (you have not defaulted on any loans or payments), the extra savings could be used to increase your equity in the property and thus reduce or eliminate the payment of any LMI, or help you to get a Low Doc Loan if you are self employed, have an inconsistent income stream, or where documentation for proof of income is limited. Summing up, the savings in the bank will provide you with the biggest benefit in this case.

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In the US, savings and even income are not part of one's credit score. In theory, the score measures your risk of default from your pattern of how you handle credit in the past. The bank will use a combination of the score and a portion of your income to qualify you for the amount they'll lend at a given rate. A higher deposit might offset a lower score a bit, as the banks risk is obviously less on say, a 50% loan to value mortgage, vs just 20% down. The amount you have saved in the bank doesn't count for much, if anything, if it's not used for a downpayment. It can easily be spend on beer and women after you close on the house.

(At the OP's invitation, I answered how it's done in the US. I know he tagged the question Australia.)

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  • I dont see where I asked how its done in the US. I have lived in the US and wanted to know how its done in Australia. – happybuddha Mar 10 '14 at 8:02
  • "what is more inline with a (USA) credit score kind of thing -" sorry, I read too much in to this. Although it appears Victor's answer was confirmation it's much the same 3 factors. – JTP - Apologise to Monica Mar 10 '14 at 9:46
  • @JoeTaxpayer - propbably the main difference is that in Australia we don't emphasis so much on an actual credit score. The banks will look into your credit history, which will have black marks against it if you have defaulted on any loans in the last 7 years. – Victor Mar 10 '14 at 10:08
  • Thanks, Victor. I think it important that into future credit related answers to offer a distinction between credit score and credit report. People refer to both but might not quite understand distinction. – JTP - Apologise to Monica Mar 10 '14 at 11:57
  • @JoeTaxpayer - update - just heard that our politicians have recently passed legislation to reduce the period of time one can be late on the payment of a loan or credit card, etc. before it becomes a black mark on your credit history. The period has been reduced from 60 days to just 5 days late. – Victor Mar 12 '14 at 7:16

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