Before banks or financial institutions approve a home loan, they perform extensive research on the applicant’s financial history, which makes it important for prospective buyers to be prepared, says Adrian Goslett, the regional director and chief executive of RE/MAX Southern Africa.
He says that, before you apply for finance, you need to assess your financial situation and know the answers to the following questions:
• What is my credit score?
Goslett says you should know your credit score and check your credit record with the credit bureaus to ensure everything is in order. It is possible for negative credit information to be recorded by mistake.
“Checking your credit record before applying for finance will allow you time to rectify any mistakes that could harm the success of your bond application.
“Consumers are entitled to a free credit report from each credit bureau per year, so they should be sure to check. Any accounts or bills that have been handed over for collection should be paid and sorted out before applying for finance. Defaults or slow payment notifications will have a negative impact on a credit score, so it is important to make payments timeously.”
• What is my annual income?
Goslett says your income will determine the bond amount for which you qualify. “It is important to include any bonuses or annual investment returns when making this calculation.”
He says your tax return documents can help you to determine your actual annual income.
• How much debt do I have?
Goslett says disposable income is a key consideration when banks decide the amount they are willing to lend.
“The bank will require applicants to provide them with a list of their monthly expenses to determine the debt-to-income ratio. The ratio will be used as a measurement to determine the appropriate bond amount that the applicant can afford. Having a lower debt-to-income ratio will be highly beneficial to consumers who want higher bonds,” he says.
• What is my financial worth?
“Financial worth is more than just your income. It also relates to any assets owned, such as vehicles, investments and income-generating properties,” he says.
• What kind of deposit can I put down?
Goslett says the bank will require a deposit, which can be between 10% and 30% of the purchase price of the property depending on the circumstances.
• What can I afford?
“In an ideal situation, the monthly house payment, which includes the bond, interest, taxes and insurance should not take up more than about 30% of your income before taxes. It is possible to get an idea of your affordability levels from an online bond calculator or with the help of a financial professional.”
Goslett says a key element of homeowner readiness is financial preparation. “Being prepared and having a clear understanding of your financial situation will make the bond application process far smoother.”
SAVING FOR A DEPOSIT
Saving for the deposit on your first home requires a disciplined approach, says Gerhard van der Linde, the managing director of Seeff Pretoria East.
“When you are serious about saving money, the best thing to do is to speak to a financial adviser as soon as possible. There are different ways of saving, and every method comes with its own associated risks,” Van der Linde says.
“If you want to save money over the short term (two years or less), it is usually best to opt for an account where the interest rate is fixed and you have no risk of losing any money. But if you have a longer-term approach in mind (two to five years), it is better to invest your money in an exchange traded fund or unit trust in order to generate a higher return.”
He says the following points are also important when saving:
• Do not save money in an account that you use to transact. Open an account specifically for the purpose of saving.
• Save automatically by setting up a debit order that goes off your transaction account. If you don’t do this, you may spend the money instead.
• Pay off your debt. Not only will this give you more disposable income and allow you to save more over the long term, but a good credit score will enable you to qualify for better terms on a home loan.
• Create a budget and stick to it no matter what.
• Deposit any “extra” income, such as a bonus or salary raise, into your savings account, instead of using the extra money to enhance your lifestyle.
• Preferably save into an account where you have to give notice before you can withdraw your money. This will make you think twice before making a withdrawal.
• Have a separate emergency fund, so that you won’t be tempted to use your savings in a crisis.