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Dec 06, 2012 | 0 Comment(s)
The first time you apply for a home loan is always worrying – but there are some simple steps that you can follow to increase your chances and decrease your stress.
The most important thing is to understand the process. This knowledge will help you to be successful, and give you the confidence that you’re not being unnecessarily charged.
Banks and other bond providers are engaged in a very simple business: they’re lending you money so that they can earn interest from it. To achieve this, they provide a large amount of money upfront and take repayments from you in manageable amounts for a long time.
Their fear is that you’ll stop paying, and all of the requirements for your loan application are designed to minimise their risk of this happening. To combat this, they’ve created a series of rules based on statistics; rules which are followed fairly blindly. While this can work against your particular individual financial circumstances, it also means that you can knowingly structure your information in a way which offers the best chance of success.
Minimum income to qualify for a home loan
Calls to several South African banks confirmed that there is actually no minimum income to qualify for a home loan. Banks use your income purely to determine the SIZE of the bond that you do qualify for.
As a rule of thumb, banks will offer you a bond up to the point where you will use one-third (33%) of your monthly income to make the monthly bond payments. These monthly payments will be calculated based on the interest rate the banks offer you. They decide this based on something called the “repo rate” or prime interest rate – which is set by the SA Reserve Bank. The banks will probably charge you a slightly higher rate, so if the prime rate is 8.5% (as it is at the time of writing in 2012) - your interest might be 10%. That’s a good rule of thumb, and means roughly R10 per month per R1 000 of bond. So to purchase a R200 000 property, you’d pay about R2 000 a month, so you would need to earn about R6 000 a month.
Don’t apply for a loan that exceeds your “affordability” status. Remember that it is possible to purchase a property jointly with someone else. In this case, your combined income will be taken into account.
How your credit record affects your home loan
Virtually every single person’s credit history is on record, and you’ll be required to give permission for this to be accessed as part of your home loan application. You can get these details yourself first so that you can see what your profile looks like. In fact, you’re entitled to a free copy of your current profile once per year from each of the 3 major credit bureaus (they each store slightly different information). If things look less than perfect for you, you must sort them out before applying for a home loan.
Your credit record isn’t just a Yes/No number – banks also use it to decide what interest rate to offer you. The better your credit record, the more institutions will consider you a good risk. The more likely you are to be offered a loan by another institution, the better the deal you’ll be offered to try and ensure that they get your business. It may even be worth taking small lines of credit (like retail accounts) and paying them well for a few months to improve your credit status before applying for a loan.
There are ways to rehabilitate almost any credit record blemish, and they’re worth investigating given how profound a small difference in the interest rate of a loan can be.
Home loans for first time home owners
First-time buyers enjoy some special privileges and opportunities. The basic criteria are that it needs to be the first time you’re applying for a home loan; you need to be at least 18 years old; and you must have been permanently employed for 6 months, or self-employed for two years.
Some banks will offer first-time buyers a bond above 100% to help you cover the transfer and legal costs as well as the purchase price. And almost all institutions now offer a 30 year bond repayment period, to make the monthly costs more accessible, an option which banks created specifically for first-time buyers.
Some banks will let you - or sometimes make you - take out a bond protection insurance policy (covering your outstanding bond if you die), which will act as security for the loan.
If you’re a first-time buyer, make that fact very clear on your application so that you can derive any applicable benefits and leeway the banks may offer.
Make a quality purchase
Banks don’t only look at your financial situation; they also consider the property that you’re applying to purchase.
They’ll assess its value based on a Comparative Market Analysis (a “CMA”) which gives an indication of what similar properties in the area have been sold for. If the price of what you want to buy differs too significantly from this norm (in either direction), the property will be “red flagged” and approval will be more difficult.
In the case of apartments, some banks also look at the financial state of the Body Corporate (the body that represents all of the owners). The more money they have in their account, the less danger there is that you’ll suddenly be called on in the future to pay large amounts towards repairs or maintenance – affecting your ability to pay the installment on your home loan. In marginal cases, the bank’s impression of the property itself can sometimes make the difference.
Get help from professionals
Given how important this information can be to your success, it’s always advised that you get someone knowledgeable to help you interpret the information and prepare your application. Do not hesitate to get professional help.
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