How to manage and prepare your credit score before applying for a bond.
Category Newsletter: Latest News
As interest rates and the cost of living continue to rise and belts are tightened even further, it's becoming increasingly difficult to make ends meet, let alone buy property, but if you plan ahead and do the work, acquiring your own home is not as impossible a dream as it might seem.
This is according to Cobus Odendaal, CEO of Lew Geffen Sotheby's International Realty in Johannesburg and Randburg, who says that dreams are often dashed by the fact that, although most people appreciate the importance of maintaining a good credit rating, not everyone is aware of all the ways in which they can bolster - and hamper - their score.
"It's not uncommon for a bond applicant to be genuinely surprised when a credit check throws up negative results and their application for finance is declined.
"Many people don't realise that even seemingly minor things can count against them, including late payments and unresolved disputes with companies, even if they are in the right.
"So, all too often we see financially stable and generally credit-worthy buyers having their property dreams scuppered by long-forgotten debts, often innocently overlooked because of circumstances like moving house.
"And, although they may have originally been small amounts, legal fees and penalties can escalate the amount owing and sometimes there is even a judgement against them."
Odendaal believes that knowledge is key when it comes to managing one's credit.
"The more you understand about the factors that affect your credit score, the easier it will be to maintain a good rating, especially if you are planning to apply for substantial finance like a mortgage."
Important criteria
Although the two most critical requirements are a good credit score with a track record of repaying contractual debt responsibly and being able to afford the monthly bond instalments, banks also take several other factors into consideration.
"For instance, a factor which one would expect to count in an applicant's favour is having high but unused credit available on retail accounts and credit cards, but the opposite is true," says Odendaal.
"Banks will automatically include the potential instalments on these unused credit facilities in their affordability calculation, with the rationale being that the applicant could at any stage max out his/her credit facilities.
"So, before you apply for home finance, you should either reduce their credit limit amounts or else close unused accounts so that your affordability isn't prejudiced."
He also advises that, in the time leading up to their bond application, people limit their any other finance applications to only those that are absolutely necessary as too many credit inquiries, whether they be for a credit card or a loan, can negatively impact on your score.
"This is one of the key benefits of using a bond originator when shopping around for the best rate as, being service providers rather than credit providers, they therefore leave no footprint."
Affordability vs income
Odendaal adds that there is a difference between qualifying for credit with regard to gross income and affordability, both of which the banks the banks take into consideration.
"As a rule of thumb, the larger the margin between gross income and expenses, the better the rate applicants are likely to be offered so I always also advise people not to go buying a brand-new car just before they apply for a mortgage."
A good credit score is equally important in the rental sector as it can be very difficult finding a home to rent if is one is regarded as high risk.
"Although a tenant's credit score is not necessarily an accurate indicator of how reliably they will pay their rent, especially in these tough economic times, it's generally the only way that agents have of gauging potential payment behaviour."
The best way to establish a good credit score is consistently over time and Odendaal advises that those with a scant record should start with small accounts like store credit and cell phone accounts and try to include a credit card in the mix. Keep your debt low and always pay on time, paying more than the minimum instalment when possible.
"Although the Credit Amnesty Bill implemented on 1 April 2014 stipulates that credit bureaux must now automatically remove paid-up judgments and paid-up adverse information listings, banks still have access to payment profile information which displays payment histories.
"So, if you have negative information on your credit report, there is unfortunately no quick fix as your credit score is influenced by your payment profile behaviour over the previous 24 months, so all you can do is pay your bills on time and be patient."
An article published on Property24 on October 12, 2018, features Mpho Ramatong, FNB Home Finance Division Channel Head: Housing Schemes, who said when lenders assess an application, affordability, which considers your total income relative to living expenses, is an important measure used to determine whether you would be able to keep up with monthly home loan instalments or not.
This can further influence the home loan amount and interest rate you would be quoted for the term of the loan.
"Therefore, taking the time to ensure that your living expenses are declared correctly can go a long way to ensure that you get the best possible bond deal from your bank," said Ramatong as she unpacked some of the common mistakes that consumers make when completing the expenses portion of a home loan application:
1. Duplication
Some applicants fail to get a good home loan deal due to the duplication of expenses.
For example, if you have declared funds that you prepay into your credit card monthly, which you may be using to fill up for petrol and for groceries, you need not complete the groceries and petrol expenses portion in the form.
Ramatong said another form of duplication may arise if you are co-applying with a partner or individual that you stay with. In this instance, only one applicant may declare shared living expenses. For example, rent, water and electricity costs.
If the expenses are duplicated, lenders may not always be aware that the co-applicants stay together and share some expenses.
2. Dishonesty
Being dishonest about your living expenses may lead to your application being declined.
When applying for a home loan, banks require that you submit a payslip and six months' worth of bank statements, amongst other documents. As a result, any disparity in the expenses portion of the form can easily be picked up by the bank.
3. Entertainment
Be careful not to mistakenly declare a high entertainment expense by failing to separate needs from wants.
For example, a need could be monthly costs for educational or recreational activities. A want can be anything that you would possibly cut back on in tough times, such as movies or eating out at restaurants, and so forth.
Finally
"If you aren't sure about how to correctly declare expenses, it is advisable to consult your bank or an expert to avoid making costly mistakes," said Ramatong.
Author: Property24
