How To Prepare Yourself Financially For Buying A Home
It is always best to determine if and for how big a home loan you qualify, before you start house hunting. There is nothing as disheartening as finding a dream home or perfect property and then "losing it" due to the bank not being willing to grant you a big enough home loan.
For prospective home buyers rising interest rates and inflation will have an influence on home loan affordability and their credit records. Banks will be applying their credit granting criteria more strictly as the affordability of any new loans will be affected in terms of how borrowers will be able to repay it or not.
Banks have a legal obligation in terms of the National Credit Act to ensure that home loan borrowers will not become over-indebted by any new loans. If your current monthly obligations and debt instalments already covers most of your after-tax income, banks will turn your 100% bond application down (for a loan which will cover the full asking price) and make you an offer with a lower loan to value (LTV) ratio. This will mean that you will have to put down a higher deposit - which most buyers will not have.
If you are a first-time homebuyer, you need to know about all the costs and fees that come with purchasing a new home. You will also need to have money saved to cover moving costs, homeowners' insurance, and rates. To make sure you can afford the property, it is important to work out your current monthly expenses, then add the extra costs of buying your first home. Your bond repayments, together with taxes and property insurance should not exceed 30% of your gross income (before tax).
Getting Pre-Qualified For A Home Loan
Getting pre-qualified by a bond originator before you start house-hunting will prevent most of the above "surprises" and provides you with a realistic idea of what you can afford. It is however not a guarantee that your home loan will be approved, as there are many factors regarding the property that the bank considers. Roughly about 90% of home loan applications submitted with a prequalification are approved.
Browsing online as a pre-qualified buyer will also quickly orientate you where and what type or size of property you can afford. Property practitioners (estate agents) prefer working with clients who "shop according to budget" - as nothing is as disheartening to all parties as a turned down bond application.
Furthermore, estate agents are all working for commission, meaning they work at risk and cannot really afford working with buyers who make offers "blindly" - meaning, does not know what their spending limit is or what size home loan they will be granted by the banks.
Getting pre-qualified is the same as applying for a home loan. So, you would need to submit all the relevant documentation to the bank. Once your application is approved, you will receive a pre-qualification certificate which shows the home loan amount you have been pre-approved for.
Deposit
You can get a home loan without paying a deposit and banks do make provision for 100% home loans to first time buyers (which sometimes even make provision for legal fees to be included).
A deposit will always make your offer to purchase more attractive to all parties - including the seller and banks. The bigger the deposit, the more negotiating power you will have with the banks when it comes to the interest rate, as the bank's risk will be lower. Your goal is to secure a home loan with as low interest rates as possible.
If the home loan amount you pre-qualify for is not sufficient to buy into specific suburb or type of property you would prefer, then you should either have equity available from the sale of your existing property or strive to save for a deposit of at least 10% to 20% of the ideal property's purchase price.
Buyers without a big deposit are sometimes confronted with a nasty surprise - a bank valuator not finding enough value (read security) in the property they would like to buy. All home loan approvals are subject to a bank appointed appraiser's home valuation. This certified valuator assesses the value of the property which is going to provide the security for your loan and if the value is less than the price you have offered or the loan amount you have applied for, the home loan application will either be rejected, or the bank will ask you to pay a bigger deposit to lessen their risk.
Legal Costs & Affordability Calculators
Always ensure that you have enough funds available to cover the transactional costs such as bond initiation fees, transfer duty (property tax), legal fees of the conveyancer and Deeds Office as well as the bond registration costs. This can be as much as 10% of the property's price.
You can fairly easily assess what size home loan you can qualify for by follow the link to our 3 online calculators : (1) bond repayment, (2) bond and transfer cost and (3) affordability calculators .
The affordability calculator will consider your net income (after tax and deductions), your total expenses, the interest rate and the bond repayment period over e.g. 20 or 30 years. As a rule your monthly home loan repayment should not be bigger than 30% of your (or your household's) gross monthly income.
Managing Your Credit Profile
Your credit score informs banks about how well or badly you manage your debt and how much of a risk you are. A good credit score is above 600 and improves your chances of getting a home loan. You can check your status by getting a free credit report from one of the credit bureaus such as TransUnion or My Credit Check.
Managing your debt repayments meticulously by always paying your bills on time is very important - as that will show up on your credit record. Even if you have never defaulted on a loan or missed a rental payment or car instalment, but are habitually paying your bills late, it will negatively influence your credit record and risk profile to the banks. Paying your credit card, cell phone bills and store card instalments timeously for a few years before applying for a home loan is important. Any unresolved debt judgments against you will disqualify your home loan application.
There are also other factors you need to take into consideration. If you have signed as surety for someone and they would default on their debt repayments, it will also have a negative influence on your credit record. If you would buy a property have a clean credit record but your partner or co-applicant does not, your application could be turned down.
Job and income stability for at least two to three years before you apply for a home loan is a very positive sign to banks. Self-employed home loan applicants however need to keep meticulous records of their income, expenditure, assets, and liabilities. Here it is advisable to work with a very experience bond originator.
For home buyers with a previous home loan rejection, it is important to know that the rejection has also been reflected on your credit history. Without any positive changes affected by yourself since the rejection, such as paying off debt or proof that you have been paying your accounts on time and in full every month, the banks will not approve the new home loan application.
Home Loan Application Process
We recommend using a bond originator and not your own bank's home loan consultant as the channel through which you launch your application - the moment you have a signed Offer to Purchase. It is very important that the banks should be competing for your business in terms of their interest rate offerings. Bond originators provide a home loan comparison service and makes the application process easier by applying to multiple banks on your behalf, comparing home loan deals to find the best one for you.
The documents usually required for a home loan application include:
For employed individual:
- Offer to Purchase
- Copy of Identity document (for both applicants if applicable)
- Latest payslip
- 6 months consecutive payslips if commission/overtime is earned
- Latest 3 months personal bank statements
- Copy of marriage certificate or ANC contract (if applicable)
- Personal assets and liabilities statement for loan amounts over R1 500 000
For a self-employed individual:
- Proof of income: letter of drawings from an accountant (for all applicants if applicable)
- Latest 6 months personal bank statements (for all applicants if applicable)
- Personal assets and liabilities statement
- Latest 6 months business account bank statements
- Latest 2 years' annual financial statements
- Where annual financial statements are older than 6 months to date, current management accounts not older than 2 months signed by the applicant and accountant must be provided in addition to the annual financial statements.
- Copy of your ID document (for all applicants if applicable)
- Copy of marriage certificate or ANC contract
- Copy of registration documents or trust deed
- Copy of purchase agreement
- 12 months bond statements (if you are switching your existing home loan to another financial institution)
- Latest rates/levy statement/utility account statement (if you are switching your existing home loan to another financial institution)
For Non-Resident individual:
- The loan amount may not exceed 50% of the purchase price of the property. (The Reserve Bank rule is that for every rand you bring into the country, they will lend you a rand)
- The buyer must obtain consent from the Reserve Bank prior to the transaction being finalised. The application to the Reserve Bank can only be handled by an appointed dealer which includes the commercial banks.
- Proof must be provided that the funds for the deposit emanate from the country of origin, which can be done by the attorneys involved in the property transfer.
- A statement of foreign assets and liabilities must be made available.
The interest rates the banks will offer you will depend on how much of a risk the bank considers you to be and on the market forces (e.g. the repo and prime rates are determined by the SA Reserve Bank). The most important factors over which you have control to influence the interest rate offered to you, is the size of your deposit you have available and on your credit score.
Variable versus fixed interest rates
After your bond is registered, you have the option of asking the bank to fix your interest rate. A variable interest rate means the interest rate on your home loan will rise and fall with the market, while a fixed interest rate stays the same regardless of market forces for an agreed period.
Each has pros and cons. Variable rates can be beneficial if the market rate drops and yours drops too, but detrimental if the rate rises, increasing your interest payments.
If you would prefer to be able to plan a tight budget, a fixed interest rate will give you that certainty, as the monthly repayment amount would not fluctuate. Taking a variable rate means you are willing to gamble on the market working in your favour.