Deciding to buy a property is one of the most exciting and daunting decisions you will likely make in your lifetime, especially if you are a first time buyer and new to the market. Home buying demands a high degree of financial responsibility and commitment. The financial institutions responsible for approving home loans are fully aware of the financial burden a home loan can place on a household, and take a number of factors into consideration when considering a bond application.
Banks will largely base their decision to approve or decline a bond application on how creditworthy they deem you to be. But what exactly does creditworthiness entail? Your creditworthiness is determined by your repayment history and credit score, as well other factors such as current financial circumstances, expendable income, other credit commitments and previous or existing debt.
The lenders also take age, residence, marital status and employment into account. Together, these factors form part of a credit risk evaluation which the credit provider uses to determine whether or not you, as the applicant, are a high or low risk when it comes to defaulting on your monthly instalments. With this in mind it's evident that a healthy credit record is an invaluable asset when approaching a bank for finance. An unappealing credit history and repayment behaviour poorly affects the scoring of the application, and may result in a higher interest rate or a lower loan amount offered. In many cases - as much as 50% of applications submitted on a monthly basis - the applications are declined.
However, if corrective action is clearly evident in an applicant's financial history, or there is proof that a default/judgement that has been settled in full (or an agreement made with the creditor to continue with repayment over an extended period) banks may not immediately classify you as "un-creditworthy". In fact, if the lender can see a continued improvement in your repayment behaviour, responsible and frugal spending habits and a commitment to repay any debt in full, your bond application may still be approved provided they believe you have the necessary reserve to afford the monthly instalments. A sizable deposit that meets the bank's deposit requirementswill notably strengthen your bond application, as will a commitment to saving a portion of your salary monthly.
It is essential that you meet the affordability assessment implemented by the National Credit Act (NCA) to qualify for a home loan.
Are you Credit-Worthy?
It's vital that you establish a good credit record and ensure that it reflects a positive repayment performance before applying for a bond! This requires realistic budgeting, disciplined debt repayment and prioritised credit commitments. Handling your finances conscientiously will assure the lender that you are in the financial position to pay your bond in full and on time every month. TPN is just one of the registered credit bureaux that offer a comprehensive, free credit report to consumers who would like to know their credit-standing.
This service is an indispensable tool in correcting a poor credit record and establish a healthy credit profile going forward. Your focus should be to build a positive credit profile that reassures banks of your responsibility, credibility and affordability!
In conclusion, there are a number of ways that you can ensure that you are "Credit-Ready" before applying for a bond and taking the first steps towards owning your dream home. Address any issues in your credit profile early on to avoid any delays in the buying process, or unwelcome penalties such as high interest rates and low loan amounts. Settle your debt, prioritise your credit repayments, save monthly (towards the deposit or for a "rainy-day"), spend wisely and practice responsible budgeting. These guidelines will place you in a lender's good books and will set you on the course of bond approval and your new home.
