If you’ve decided to become a homeowner, the first thing you need to do is find out whether you have a good chance of being approved for a home loan, or whether lenders will consider you too high-risk.
“It’s all very well to start looking at online listings or visiting show houses to find your dream home. But you first need to work out how much you can afford to spend, how you plan to finance your purchase, and then whether the banks will even consider you for a home loan,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator.
What the lenders look for
“Lenders are always on the lookout for low-risk borrowers. These are consumers with good credit records that show they have been diligent about repaying previous debts; consumers without so much current debt that it would be difficult for them to afford another monthly instalment; and, consumers who have a proven and regular source of income.”
“If you don’t meet these requirements they will put you into a higher risk category, which could mean that you need to put down a bigger deposit before they will agree to give you a home loan, or that they will charge you a higher rate of interest on your loan, or that they will refuse to grant you a loan altogether.”
Mr Rademeyer says that even if lenders consider you “high-risk” now, it is not the end of the road for your home ownership plans. “You don’t have to resign yourself to being a tenant forever. Work with a reputable mortgage originator like BetterLife Home Loans that can advise you how to become a lower risk prospect, and will then prepare, motivate and manage your application in a way that ensures its best chance of success.”
Mr Rademeyer says some of the most important steps for potential borrowers to take before they apply for a home loan include the following:
Pay all your accounts on time
This means bills should be paid before or on the due date. This may not seem like a big deal but, for example, if you are even three or four days late with your rent every month, it will show up on your credit record. That could make it look as though you are struggling to make ends meet and would not be able to cope with any more credit.
Clear up your record
Attend immediately to any serious defaults and debt judgments, and make sure they have been removed from your credit record once you have paid them off. Most lenders will not even consider you for any new loan unless you do.
Make sure that you have a clear record of income
Ensure that you have pay slips as your supporting documentation if you are in full-time employment, or, if you are self-employed, by the bank and financial statements and tax records. Ask your mortgage originator to review these and your monthly expenditure with you and help you work out what size home loan you might be able to afford.
Pay off as much of your existing debt as possible
If you have a large outstanding student or personal loan, an unpaid tax bill or a big car repayment to make every month, there is a big risk that your income won’t stretch to also cover a home loan instalment every month. So, you might want to consider renting a cheaper place, taking on a weekend job or downsizing to a cheaper car – whatever it takes to get that other debt paid off.
Save up for a sizeable deposit
Once you have an idea of the home price you could comfortably afford, you should aim to have at least 15-20% of this amount available in cash before you apply for a loan. Even if you don’t use it all as a deposit, saving diligently will demonstrate to lenders that you are financially responsible. It could also help you secure a loan at a lower interest rate, which would save you many thousands of rands over the life of your loan.