The National Credit Act (34 of 2005) specifies that credit providers may not allow consumers to get into financial difficulties by borrowing more than they can afford. For this reason, any banks you approach for a home loan will carefully check all your documentation. They will also check whether you are a good credit risk by asking for your credit scores from the credit bureaus that operate in South Africa.
To ensure you are not getting yourself into financial hot water, you should confirm the loan amount that the bank is likely to grant you, by applying to a reputable bond originator for pre-qualification.
It’s important to do this before you start house-hunting so that you won’t waste time and energy on properties outside your price range.
Being pre-qualified will also speed up the home loan application process once you have decided which home to buy. This is important, as you will usually have only about 30 days to confirm to the sellers that your loan is approved.
When you apply for pre-qualification the bond originator will ask for the following documents:
- A copy of your identity document.
- Proof of residence.
- Bank statements and salary slips for the past three months.
- If you are self-employed, you will need to provide a letter of income from your accountant.
To apply for a home loan, you will again need to supply all the above documentation, as well as a copy of the offer to purchase.
If your pre-qualification application is declined, the bond originator needs to let you know why this has happened.
Possible reasons could include:
- Poor credit score.
- Too little income.
- Insufficient work history.
To remedy these will take some time, but it can be achieved by applying the measures below.
- Improve your credit score by paying off outstanding debts if applicable. If your credit score is low because you don’t have a track record of paying off accounts, the remedy is to open one or two store accounts or a credit card account. Make sure you pay the outstanding amounts each month for several months before reapplying for prequalification.
- To remedy the problem of insufficient work history, you will need to work for at least another six months to a year – preferably for the same organisation.
- Increase your income may be a little more difficult. The obvious course of action is to look for a position with higher pay and better prospects, but this is not always possible. You could take some short courses to improve your chances of finding more highly paid employment. Or you could find part-time weekend work to supplement your income.
Buying your own home is one of the most important investments you will ever make and will set you on the road to creating personal wealth. It is well worthwhile putting in the effort needed to achieve this goal.