If you’ve decided to become a homeowner, the first thing you need to do is find out whether you have a good chance of being approved for a home loan – or whether lenders will consider you a high-risk or low-risk borrower.
“It’s all very well to start looking at online listings or visiting show houses to find your dream home. But you first need to work out how much you can afford to spend, how you plan to finance your purchase, and then whether the banks will even consider you for a home loan,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator.
“Lenders are always on the lookout for low-risk borrowers – that is, consumers with good credit records that show they have be diligent about repaying previous debts; consumers without a too much current debt that will make it difficult for them to afford another monthly instalment; and consumers who have a proven and regular source of income.
“And if you don’t meet these requirements they will put you into a higher risk category, which could mean that you need to put down a bigger deposit before they will agree to give you a home loan, or that they will charge you a higher rate of interest on your loan, or that they will refuse to grant you a loan altogether.”
However, he says, even if you think lenders might consider you to be a “high-risk” now, it is not the end of the road for your home ownership plans. “You don’t have to resign yourself to being a tenant forever. Work with a reputable mortgage originator like BetterLife Home Loans that can advise you how to become a low-risk borrower, and will then prepare, motivate and manage your application in a way that ensures its best chance of success.”
Rademeyer says some of the most important steps for potential borrowers to take before they apply for a home loan include the following:
- Pay all your accounts on time – that is, before or on the due date. This may not seem like a big deal but if you are even three or four days late with your rent every month, for example, it will show up on your credit record. That could make it look as though you are struggling to make ends meet and would not be able to cope with any more credit.
- Clear up any serious defaults and debt judgments and make sure they have been removed from your credit record once you have paid them off. Most lenders will not even consider you for any new loan unless you do.
- Make sure that you have a clear record of income, supported by pay slips if you are in full-time employment or by bank and financial statements and tax records if you are self-employed. Ask your mortgage originator to review these and your monthly expenditure with you and help you work out what size home loan you might be able to afford.
- Pay off as much of your existing debt as possible. If you have a large student or personal loan outstanding, an unpaid tax bill or a big car repayment to make every month, there is a big risk that your income won’t stretch to also cover a home loan instalment every month. So you might want to consider renting a cheaper place, taking on a weekend job or downsizing to a cheaper car – whatever it takes to get that other debt paid off and turn you into a low-risk borrower.
- Save up a sizeable deposit. Once you have an idea of what price home you could comfortably afford, you should aim to have at least 15 to 20% of this amount available in cash before you apply for a loan. Even if you don’t use it all as a deposit, saving diligently will demonstrate to lenders that you are financially responsible. It could also help you secure a loan at a lower interest rate, which would save you many thousands of rands over the life of your loan.