Updated 12.06.2021

10 Things to Know Before Applying for a Home Loan

Dreaming of owning a house?

Before you go out and apply for a home loan, you should improve your knowledge about it first. 

Here are the 10 things you need to know before going for a home loan application in South Africa.

You Must Assess Your Budget

The first thing you should check is your current budget. Look at your bank account and assess if you can afford to get a loan. 

Some lenders advise you use the 28/36 rule as a guide to determine the loan amount you can afford. 

This rule states that the monthly loan repayment you plan to avail shouldn’t exceed 28% of your household income. To add, all other loans including your potential mortgage should not exceed 36% of your overall gross income. 

These figures aren’t strictly followed, but they’ll give you an idea of how much you can borrow without succumbing to over-indebtedness. 

Your Credit Score Will Have a Huge Impact on Loan Rates

Before you even start looking for a home loan in South Africa, check your financial status first and see if it’s in good condition to handle a loan.

Lenders will first look at your credit standing to assess whether you can handle debts. Your score will tell how you manage expenses and if you have a low risk of defaulting on the loan. 

If you have a high score, you can be confident about getting your home loan approved.

However, if you have a low credit rating, think twice before applying unless you’re ready to face enormous interest rates.

Still, it’s not the end of the world if you have a low credit score. There are actions you can take to improve your rating and make it more viable for getting a home loan:

  • Reduce your expenses

Affordability assessments will determine the size of the loan that lenders may approve. Lenders will take a close look at how you spend your monthly income and estimate whether you can pay the loan given your spending habits.

To improve your credit score, start canceling services or subscriptions that you rarely or never use. There have some effective and smart ways you can follow to improve your credit score. Check if you’re also getting the best deals on your utilities and insurance plans.

  • Avoid simultaneous credit applications

Applying for multiple credit lines before you take a home loan is a big no-no. Each time you apply for credit, a hard inquiry is done on your score, and this negatively impacts the rating. Do it multiple times and you’re on your way to disaster.

If you need to apply for a debt product before you get a home loan, go for those that have pre-approval options. This won’t negatively impact your credit score unlike directly applying for a loan.

Don’t forget to regularly check your credit score. You can request the major credit bureaus for a free credit report every year.

Look at Upfront Costs

Aside from the down payment, upfront costs include bond registration costs, transfer fees, and loan initiation costs. There’s also the Transfer duty cost for properties valued at R1 million.

Some lenders may waive their fees, depending on your negotiation. Those with high credit ratings often get more favourable terms and lower fees compared to those with only average scores.

Look At The Interest Rates

Generally, you’ll see two types of interest rates on your home loan: variable and fixed interest rate.

  • Variable interest

A variable rate is linked to the prime lending rate in SA. This means it fluctuates according to the current lending rate in the country.

For lenders, this poses fewer risks, which means they can offer more competitive rates on home loans.  

For borrowers like you, you can take advantage of decreasing rates and pay less on your loan for the year.

  • Fixed-rate

With a fixed rate, you’re bound to stick with a specific interest rate for a certain period. This means you’ll pay based on the same interest rate, regardless of the changes in the prime lending rate.

Lenders usually offer this for a short period before transitioning to a variable rate. Still, you can renegotiate for a new fixed-term rate if your lender allows it. 

There’s no exact science on which of the two types of interest rates will be most beneficial to you. You must do your homework and assess which of them is more suitable for your current and projected financial situation.

READ ALSO: Home Buying Checklist for First Time Buyers

Use a Home Loan Calculator

Online home loan calculators will give you a rough idea of how much you can borrow as well as the monthly repayments associated with it. Interest rates can also be customized to see how much you’ll be paying if you select the variable or the fixed-rate loan term. 

These loan calculators are free to use. Take advantage of them to avoid getting surprised by the cost of a home loan.

Doing Joint Applications Increase Your Chance of Qualification

Joint applications can increase the chance of getting approved for a home loan. Banks will consider the combined income and expenses of both applicants to assess whether they can afford the loan. 

By combining your gross income with another person, you get a higher affordability ratio that has a better chance of passing qualifications.

There’s still a catch to this, though: you must make sure that you and your co-borrower both have a good credit score. 

Another thing to remember about this method is how each person is liable for half of the fees and the loan amount. If one person pulls out of the bond, the existing home loan will be scrapped and a new one needs to be registered. This means either of you must pay for bond registration fees again to secure the loan.

Prepare the Documents Needed

Aside from your age and credit score, financial institutions will require several documents as proof of your financial capability. There may be slight differences in requirements, but lenders will most likely ask for the following documents: 

  • Proof of income like payslips. Usually, lenders will ask for the last three payslips you received.
  • Bank statement covering the previous three months’ transactions.
  • A copy of your South African ID document.
  • A statement of your income and expenses per month.
  • Personal assets and liabilities.

If you’re self-employed, you may have to submit more documents to prove that you can afford the loan. You’ll need annual financial statements and additional documents to support your history of having a regular income.

Even before you apply for the loan, you should know which documents will be most likely needed by your lender. 

A Bond Originator Can Make Your Life Easier

A bond originator’s job is to get you the best home loan deal available. They compare the rate of several lenders and come up with suggestions on which of them is the best fit for you.

Bond originators also assist home loan applicants in compiling paperwork and submitting the required documents to banks. This gives you more time to do other things instead of collating the requirements for the loan.

Have we told you that their service is free? Bond originators won’t charge you because they earn commissions from banks for every successful client they endorse.

Bond originators don’t work on behalf of a single bank, so you can rest assured they won’t give trick you to stick with one institution just to get their commission.

Increase Your Chances Through Prequalification

Just like in processing vehicle finance, you can apply for home loan prequalification and use it to shop around for a house. This takes away the hassle of rushing to apply for a home loan once you’ve decided on a property to purchase.

The prequalification process will assess how much the lender can offer you based on your financial standing. With a prequalified loan at hand, you’ll be in a better position to negotiate terms with property sellers. Use it to get sweeter deals that wouldn’t have been available otherwise.

Applications for home loan prequalification can be done online for your convenience.

You Can Avail of Subsidies

Do you know that the government can give financial assistance if you’re a first-time buyer? 

If your total household income ranges from R3 500 to R22 000 per month before deductions, you may be eligible for a subsidy through the Finance-linked Individual Subsidy Programme or FLISP.

FLISP works by reducing your loan amount and making it easier to do monthly repayments. It can also be used to boost your loanable amount to purchase your dream house.

Depending on your household income, you can get a subsidy amounting between R27 960 to R121 626. The lower your income, the larger the subsidy you can get from the government.

Final Thoughts

Getting a home loan is one of the biggest decisions you’ll make in life. So, instead of jumping into the water without anything except your desire to own a house, better make yourself informed on the costs, requirements, and tips involved in home loan applications. Getting equipped with knowledge on home loans will save you the trouble of getting over-indebted while helping improve your financial decisions in handling the debt.

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