It is truly exciting to buy your first home, but at the same time there is a lot of anxiety as well.
Most people are concerned about securing a home loan given that there are so many requirements to meet and paperwork to hand. In this situation, you need a reliable helper by your side. Here you will find practical tips which will make everything simple and eliminate the hassle for you.
You need to start with the basics and get a good understanding of the home loan process. The lender, which can be a bank or a bond company, provides a large amount of money called loan principal which you use for the purchase of a house. The goal of the lender is to earn a profit from the loan provided to you. That is why they charge interest. When you repay the loan, the monthly instalment will consist of an interest component and principal component, which is basically part of the money which you have borrowed initially.
When a lender provides a large amount of money to you, they assume the risk that you may not be able to repay the principal plus interest in the future. In order to minimize this risk, they set a comprehensive set of requirements which you have to meet in order to be considered reliable borrower. This should not scare you, however. When you know the requirements well, you will be able to devise an effective strategy which will help you meet them fully.
South African banks do not set any particular income requirements for home loan applicants. There is not a minimum income which makes you qualify. The lenders use the size of your income to determine what loan amount to provide to you.
The maximum loan amount which you are able to obtain corresponds to monthly payments which are 33% of your monthly income. This is the rule which most lenders use to determine the bond amount. In order to calculate the precise monthly payment amount, lenders use the interest rate which they charge. Each bank's interest rate is based on the interest rate set by SARB (the South African Reserve Bank). It is also known as the repo rate.
If the repo rate is 9%, for example, the interest rate on your bond can be somewhere between 10% and 12%. You can obtain the interest rate of each lender in advance and calculate how much you will be able to borrow based on your current monthly income. This will give you a precise idea of the kind of property that you can purchase.
You must ensure that the home loan which you take out will be affordable for you to repay. Otherwise, the risk of losing your home will be too great. Typically, home buyers can afford to borrow more when they purchase the property together with another person who can be a spouse or another relative. In this case, the lender will take into account the combined income of the property buyers.
Credit History Requirements
By law, each lender that you apply to for a loan is permitted to access your credit record in order to review your credit history. Your credit history shows how reliable you have been in the past as a borrower. It is best if you request a copy of your profile before you apply for a home loan. That way, you will be able to have any errors fixed and make improvements. Each year, you are entitled to one free copy of your record kept by each one of the three major credit bureaus in South Africa. The records of the three bureaus may vary slightly, but the core information should be the same.
Your credit record will determine not only whether you get approved or rejected for a home loan. It will also have an impact on the interest rate which the lender will charge you. The better your record is the lower the interest rate will be. Given this, it makes even greater sense to improve your credit record before making an application. One way to do this is to use small lines of credit several months before applying for a home loan and to repay them promptly. This should help to polish your image perfectly. In general, you can make all kinds of repairs to the record based on errors that you have made in the past. You just need an effective strategy.
Opportunities for First-time Home Buyers
Lenders are trying to attract first time home buyers by offering different kinds of benefits to them. In order to be considered a first time home buyer, you must be a South African citizen over the age of 18 and to have been permanently employed for 6 consecutive months or self-employed for the past 2 years and this must be your first home loan application.
There are two main perks which are offered by a good number of home loan lenders. The first one is a bond covering 100% of the property purchase deal. In this case, you will not have to pay for anything out of your pocket. The loan will pay for the house and cover additional costs and fees. Most banks offer a term of 30 years to first time home buyers. The longer term makes the monthly premiums smaller and therefore more affordable.
You will most likely be required to take out bond protection insurance. It is designed to pay the outstanding amount on your home loan in case you pass away.
In order to take advantage of the special benefits available, you must make a clear statement that you are applying for a home loan for the first time.
The lender will also look into the property that you plan to buy in order to decide whether to approve you for a home loan. They will run a comparative market analysis which involves the comparison of the sales price of your property against similar properties which have been recently sold. If there is a great difference between the asked price and the sales prices taken into consideration, your chances of approval will become lower.
If you intend to purchase an apartment, the lender will also look into the finances of the body which represents all owners of apartments in the building. If the body has good finances, your chances of approval will be higher. This is because the risk of you having to incur considerable maintenance and repair costs which may affect your ability to repay the loan will be lower.
For any specific questions that you have and for assistance with preparing your application, you should turn to a professional with extensive knowledge and experience in finance and home loans.