Even though around a half of all home loan applications get rejected, this does not mean that you do not stand a chance of getting approved. Quite the opposite, there are many things which you can do to improve your prospects.
The home loan application success is fairly low despite the fact that lenders have regained their stability after the recent economic crisis. There are clear indications that lenders are willing and able to offer more finance for home purchase to consumers. In this case, why are so many applicants getting rejected? The major reason for this is low credit score.
Credit Score Explained
The credit score is a number which is derived on the basis of a set of criteria. These criteria have to do with your behaviour as a credit user. More disciplined behaviour is rewarded with a higher score and vice versa. The major criteria affecting the score include:
Payments - If you make all debt payments on time and in full, you can expect to have a higher score. These include loan payments and credit card balance payments as well.
Credit accounts - The number of accounts that you have and their types will affect your credit score. The balances on these accounts will have the major effect, however. The lower they are the better.
Credit history length - A longer credit history will have a positive impact on your credit score. That is why young people are advised to start using credit facilities such as credit cards when they become employed.
Debt to income ratio - The chunk of your income which goes towards the repayment of debt impacts your credit score. The smaller this chunk is the better.
Credit profile - This is a record of your credit activity and it will affect the score directly. Any bank or retail store default listings will remain on the record for two years. Judgements against your name will remain on it for a period of five years.
In general, any credit score above 660 is regarded to be very good. On the other hand, individuals with score lower than 620 are considered to be high-risk borrowers. They will find it more difficult to obtain any type of credit and especially a home loan.
There is no way in which a person can keep his/her financial dealings secret. They are all recorded and the information is stored. The best thing which you can do is to try to make transactions which favour your score every time you need to borrow money. Even small credit accounts matter.
You are entitled to one free credit report every 12 months under the regulations of the National Credit Act. You should definitely use this opportunity to keep a check on your credit rating. Since there are three credit bureaus in South Africa (TransUnion, Experian and XDS) and you can get one free report from all of them, you can request a report every four months in order to keep your score under full control. In order to request your free credit report, you will need your ID, proof of address and a bank account statement.
Credit Score Tips
Pay all of your bills on time to increase your credit score. These include all loan payments, credit card payments, phone bills and utility bills, to mention the main ones.
You should try to repay as much as your debt as possible before you apply for a home loan. This is because lenders will regard you as a riskier borrower when you have more credit obligations.
You should use your credit cards regularly in order to maintain your credit activity and boost your credit score. Just make sure that you do not spend more than a third of the limit. You have to repay the borrowed amount in full to avoid the charging of interest.
You should avoid opening a number of new accounts within a short period of time. This will have an adverse effect on your credit score.
If you have existing accounts which you have not managed properly, you should try to improve your balance as much as possible. Try to make timely payments over the course of several months. This will have a great positive impact on your credit score.
If you have difficulties with repaying existing debt, you should turn to the lender for assistance right away instead of waiting for a legal letter to arrive in your mail box. You can negotiate deferred repayment, extension of the term or another modification which will make the repayment easier. It is important for you to focus all of your efforts on the resolution of this problem.
You should not blame lenders or the National Credit Act for the current stricter lending requirements. They actually benefit both borrowers and lenders and helped South Africa go through the recent global economic downturn. The best strategy which you can adopt in order to obtain a home loan is to save enough money for making a deposit of at least 10% and to work towards the improvement of your credit score. In this way, you will be able to get the home of your dreams.