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- Many first-time applicants are in the dark about what the banks, which approve home loans, are looking for.
- The process is relatively straightforward, provided you have all your financial affairs in order.
- The banks begin by reviewing your credit score, before moving on to your income and expenses.
The current lending climate and willingness from the banks to stimulate the property market have made the prospect of home ownership a reality for many South Africans, provided they meet the lending criteria, according to Rhys Dyer, CEO of ooba Home Loans.
According to Dyer, applying for a home loan is the most important step on the home buying journey. Yet, many first-time applicants are in the dark about what the banks, which approve home loans, are looking for.
The banks begin by reviewing your credit score, before moving on to your income and expenses to gauge your ability to repay the monthly home loan instalments.
"The process is relatively straightforward, provided you have all your financial affairs in order," says Dyer. "While an increasing number of banks are approving 100% home loans, they certainly take into account the size of your deposit as a sign of commitment."
Credit score
Know your credit score before you start the process.
"Your credit score is the best indication a bank has to determine your ability to pay back your monthly instalments each month – on time and in full. Banks gauge your 'trustworthiness' as a future borrower based on your past history of repaying debt," explains Dyer.
In most cases, banks will consider granting a home loan to applicants with a credit score of 600 plus. However, the higher your credit score, the higher your chances for approval.
"Home loan applicants should aim for the highest possible score to increase their chances of receiving a better interest rate," says Dyer.
"Start working on your credit score early. A good, detailed credit history cannot be created overnight. Banks need to see a history of you taking out some kind of loan and paying it back successfully before they can consider approving your loan. The best and most simple way to achieve this is to pay your bills in time and in full."
Payback time
Regardless of the strength of your credit score, a bank will not approve your home loan unless you can comfortably afford to pay back in monthly instalments.
The amount you need to pay in monthly instalments takes into account the loan amount you are borrowing, the term of your home loan (generally 20 to 30 years) and the interest rate that the bank offers to you.
"If you are concerned about keeping your monthly repayments down, we would recommend putting down as large a deposit as possible. Doing so will reduce your monthly bond repayments as well as the interest paid to the bank over the term of the loan. A large deposit also gives you more leverage when negotiating your interest rate," suggests Dyer.
Deposit
Dyer points out that failing to put down a deposit will not automatically mean that you are rejected by the banks. The uptick in banks approving 100% home loans is intended to give the property market a much-needed boost, as well as giving first-time buyers a viable route to homeownership.
"It is true that the higher your deposit, the less of a risk you are to your bank, as you've already proven that you have the money available to purchase a portion of the total cost of your home outright," he says.
"However, in these difficult times, banks are granting home loans with lower deposits, and even in some cases, zero deposits."
Dyer, however, cautions prospective homebuyers that there are strings attached to zero deposit home loans.
"Banks will only approve 100% loans in cases where the applicant has demonstrated a spotless credit record and can comfortably afford their monthly repayments," he says.
Other factors
In addition to your credit score, deposit and monthly repayments, each bank uses their own internal risk assessment criteria when considering a particular home loan application.
These can includes ensuring that the property you are buying offers them sufficient security for the loan amount applied for.
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