These are the steps you need to take to improve your chances of having a bond application approved in the future.
If your application for a home loan has been declined, it doesn’t mean you will never be able to buy your own home. You shouldn’t take it personally - the banks’ lending criteria are regulated by the National Credit Act and there is never any guarantee that they will be able to approve your home loan.
To improve your chances of getting approved the next time, you need to understand why your application declined. Next, you need to take the necessary steps to improve your financial standing.
There are several possible reasons lenders may have for declining your application. The two most common reasons are that you have an unsatisfactory credit record and your income is too low.
In some situations, however, other factors may also contribute to the decision. These could include:
- Your employment history – if you have frequently changed jobs in the past.
- Residence instability – if you have often moved from one address to another.
- Cash flow or liquidity problems.
Your credit history and credit scores are primary factors lenders consider when you submit a loan application. If there are any significant negative items on your credit report or other red flags, they may decide that approving your application would expose them to too much risk.
Negative items on your credit report that could result in denial include:
- Too many recent credit inquiries.
- No comprehensive credit history.
- High credit card or store card balances.
- Late payments on accounts.
- Collection accounts.
Your application could also decline if your credit score is lower than the lender's minimum requirement. To prevent this from happening again, make sure you know your credit score before applying for a home loan. Then you can shop around for loans within your credit range.
Your lender can turn down your loan application because your income is too low for two probable reasons:
First, your income is lower than the lender's minimum requirement. Unfortunately, lenders seldom make known this information, so it's difficult to know before applying if your income is high enough to get a loan.
Second, your debt-to-income ratio is too high. You can calculate this by dividing your total monthly debt payments by your gross monthly income. For mortgage loan applications, most lenders prefer a ratio of 35% or lower. If your ratio is too high, you may have difficulty keeping up with bond repayments.
Improve your chances
To improve your chances of getting approved the next time you apply, follow these steps:
If your credit score is poor, which is below 600, you should ask for a copy of your credit report from the credit bureau. In terms of the National Credit Act, you are entitled to one free credit report from each of the credit bureaus in South Africa every year. It is sound practice to ask for your annual credit report even if you are not considering a loan, to confirm your financial status.
If you find errors on your report, you need to notify the credit bureaus to ensure they take the necessary action to rectify the information displayed on the report. You may also have to get in touch with the credit provider who provided the incorrect data.
If the information is correct and your poor credit score is due to a lack of credit history, you should open one or two small retail accounts or take out a cellphone contract. Ensure that you make the required payments on these accounts on time and in full each month.
If your low credit score is due to unpaid debts, you will need to settle the outstanding debt as quickly as possible. In this case, you should avoid applying for additional credit until your record is clear.
Once you believe your credit score is back on track - and before you start house hunting again - it is worth applying for a prequalification certificate through a bond or mortgage originator.
Bond originators facilitate the home loan approval process for applicants. They will evaluate your financial status and will be able to tell you whether or not you will be eligible for a loan. If you are eligible, they will apply to several banks on your behalf to get the best lending rates. If not, they will be able to advise you on what still needs to be done to increase your chances of success.