Applying for a home loan is the most important step on the home buying journey, but many first-time applicants are in the dark about what the banks – the institutions with the power to approve these home loans- are looking for.
According to Rhys Dyer, CEO of ooba Home Loans, 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 to gauge your ability to repay the monthly home loan instalments,”
“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.” he adds.
Step 1 - Know your credit score.
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. As Dyer explains, “banks gauge your ‘trustworthiness’ as a future borrower based on your past history of repaying debt.”
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.”
Step 2 – Can you pay back the loan?
Regardless of the strength of your credit score, a bank will not approve your home loan unless you can comfortably afford to pay back the home loan via monthly instalments.
The amount you need to pay in monthly instalments is calculated by your bank and 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.”
Step 3 - Do you have a deposit?
While it’s clear that there are numerous long-term benefits to putting down an initial deposit – and the larger the deposit the larger the benefits – Dyer says that failing to do so will not automatically mean that you are rejected by the banks.
“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.”
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.
Dyer 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.”
What the banks want you to know before applying for a home loan
Believe it or not, banks want to approve your home loan – but this is only achievable if your finances are under control.
Dyer shares his top three tips for applicants hoping to have their home loans approved:
- Know your credit score before you start the process. As most banks will reject applicants with a low credit score, it’s important that you know where you stand by using tools such as ooba Home Loans’ free Online Bond Indicator to check your credit score. You can check your credit score every three months.
- 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 successfully paying it back 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.
- Remember that there are other factors at play. 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, which includes ensuring that the property you are buying offers them sufficient security for the loan amount applied for.
Concludes Dyer, “I firmly believe that the current lending climate and willingness from the banks to stimulate the property market has made the prospect of home ownership a reality for many South Africans, provided they meet the lending criteria.”
PERSONAL FINANCE