These things could kill your chances of getting a home loan

Knowledge is crucial when it comes to your credit and risk profile

BY BONNY FOURIE bronwyn.fourie@inl.co.za

MANY financially stable and creditworthy homebuyers are shocked when their home loan applications are declined due to negative credit records.

They do not realise that even “seemingly minor” things can count against them, says Cobus Odendaal, the chief executive of Lew Geffen Sotheby’s International Realty in Johannesburg and Randburg.

These include late payments and unresolved disputes with companies, even if they, the homebuyers, are in the right.

“All too often, we see financially stable and generally creditworthy buyers having their property dreams scuppered by long-forgotten debts, often innocently overlooked because of circumstances like moving house.

“And, although they may have originally been small amounts, legal fees and penalties can escalate the amount owing and, sometimes, there is even a judgment against them.”

Knowledge is therefore crucial when it comes to managing your credit.

“The more you understand the factors that affect your credit score, the easier it will be to maintain a good rating, especially if you are planning to apply for substantial finance like a mortgage.”

Important criteria

Although the two most critical requirements when applying for a home loan are a good credit score, with a track record of repaying contractual debt responsibly and being able to afford the monthly bond instalments, Odendaal says banks also take several other factors into consideration.

“For instance, a factor which one would expect to count in an applicant’s favour is having high but unused credit available on retail accounts and credit cards, but the opposite is true.

“Banks will automatically include the potential instalments on these unused credit facilities in their affordability calculation, with the rationale being that the applicant could, at any stage, max their credit facilities.”

Before you apply for home finance, Odendaal says you should either reduce your credit limit or close unused accounts so that your affordability isn’t prejudiced.

He also advises that, in the time leading up to your bond application, you limit any other finance applications to only those that are necessary. This is because too many credit enquiries, whether for a credit card or a loan, can negatively impact your score.

Affordability vs income

Aspirant homeowners should also know that there is a difference between affordability and qualifying for credit with regard to gross income, both of which the banks the banks take into consideration.

“As a rule of thumb, the larger the margin between gross income and expenses, the better the rate applicants are likely to be offered, so I always also advise people to not go buy a brand-new car just before they apply for a mortgage.”

Odendaal says a good credit score is equally important in the rental sector as it can be difficult finding a home to rent if you are regarded as high risk.

“Although a tenant’s credit score is not necessarily an accurate indicator of how reliably they will pay their rent, especially in these tough economic times, it’s generally the only way agents have of gauging potential payment behaviour.”

Therefore, the best way to establish a good credit score is consistently over time. If you have a “scant record”, then you should start with small accounts like store credit and cellphone accounts, and try to include a credit card in the mix.

“Keep your debt low and always pay on time, paying more than the minimum instalment when possible.”

Although the Credit Amnesty Bill, implemented on April 1, 2014, stipulates that credit bureaus must automatically remove paidup judgments and paid-up adverse information listings, he says banks still have access to payment profile information that displays payment history.

Be wary of credit card debt

Among the many checks that banks carry out when deciding whether to approve your application, is the amount of debt you have at that time, as well as the deposit you can pay, says Nondumiso Ncapai, the managing executive at Absa Home Loans.

She says there are a range of factors that influence an individual’s borrowing risk and their likelihood of being approved for a home loan. These include:

✦ Income

✦ Actual expenses

✦ Credit profile or credit record

✦ Current credit exposure (that is how much debt you have or are owing to creditors)

✦ The term of the loan

✦ The amount of the loan being applied for

✦ The property to be mortgaged

✦ Whether you have a deposit

Data analytics and consumer credit reporting company Experian, advises that, in most cases, it makes sense to pay off credit card debt before buying a home.

This can increase your credit score and decrease your debt-toincome (DTI) ratio, both of which may qualify you for lower mortgage rates.

“Merely having credit card debt likely won’t disqualify you from buying a home,” the company states in an article, “but it may negatively affect you in other ways, for example, in the way mortgage lenders view you as a potential borrower.”

This is how:

Credit card debt increases your DTI. One of the most important elements of your mortgage application is your DTI, including your projected monthly mortgage payment. The greater your credit card debt, the greater your DTI, and the higher the likelihood your mortgage application may be denied.

Credit card debt impacts your credit score. Lenders look closely at your credit score and at the details in your credit report, including the types of debt you owe and their balances.

Paying down credit card debt lowers your amounts owed, which is a major factor in your credit score

Credit card debt limits the mortgage payment you can afford. If you’re making a substantial credit card payment each month, taking on a mortgage could be a strain. Not only will lenders take this into account when evaluating your application, but your budget could be overburdened.

“In most cases, paying off credit card balances – or paying as much as you can to bring their balances down – is the right move. You’ll be able to lower your DTI and, hopefully, increase your credit score and qualify for a lower interest rate on your mortgage.”

To have a better chance of being approved for a home loan, Vivienne Cox, of ooba Home Loans agrees that you should try to settle your debts.

“When banks look at a potential homebuyer’s profile, they check their credit history and risk profile.

“Although settling an outstanding debt does not automatically guarantee a favourable credit score – as the repayment history of a debt remains on your credit record for two years – good debt management can work in your favour as the banks can only assess what you will do with credit if they can study your repayment track record.”

You should also try to pay the balance owed on your credit card as this has a strong influence on your credit score.

“Paying back your credit card balance has a significant impact on your score, as it’s not just about having the credit, but how you deal with it that the banks are assessing.”

Your income is not the only factor banks consider when assessing your home loan application. PICTURE: ENERGEPIC.COM/PEXELS