Black Friday is literally around the corner, with Christmas only a month later, and we know how much most people love to grab a bargain or spend loads of money on their loved ones.
Unfortunately though, while some people may have the disposable income to splash out on these occasions, most resort to using their credit cards.
And high credit card debt is not good for those planning on applying for a home loan. Similarly, even if you have the cash to spend like crazy, you are using money that could be put towards a deposit for a home loan.
Read our latest Property360 digital magazine below
Among the many checks that banks carry out when deciding whether to approve your application or not, is the amount of debt that you have at that time, as well as the deposit you can pay, says Nondumiso Ncapai, managing executive at Absa Home Loans.
“There are a range of factors that influence an individual’s borrowing risk and their likelihood of being approved for a home loan.”
These include:
- Income
- Actual expenses
- Credit profile or credit record
- Current credit exposure (i.e. how much debt you currently have or are owing to creditors)
- The term of the loan
- Amount of the loan being applied for
- The property to be mortgaged
- Whether you have a deposit or not
Data analytics and consumer credit reporting company Experian, advises that, in most cases, it makes sense to pay off credit card debt before buying a home. This can increase your credit score and decrease your debt-to-income (DTI) ratio, both of which may qualify you for lower mortgage rates.
“Merely having credit card debt likely won't disqualify you from buying a home,” the company states in an article, “but it may negatively affect you in other ways—for example, in the way mortgage lenders view you as a potential borrower”.
This is how:
- Credit card debt increases your DTI. One of the most important elements of your mortgage application is your DTI, including your projected monthly mortgage payment. The greater your credit card debt, the greater your DTI, and the higher the likelihood your mortgage application may be denied.
- Credit card debt impacts your credit score. Lenders look closely at your credit score and at the details in your credit report, including the types of debt you owe and their balances. Paying down credit card debt lowers your amounts owed, which is a major factor in your credit score.
- Credit card debt limits the mortgage payment you can afford. If you're making a substantial credit card payment each month, taking on a mortgage could be a strain. Not only will lenders take this into account when evaluating your application, but your budget could be overburdened.
“In most cases, paying off credit card balances—or paying as much as you can to bring their balances down—is the right move. You'll be able to lower your DTI and, hopefully, increase your credit score and qualify for a lower interest rate on your mortgage.”
To have a better chance of being approved for a home loan, Vivienne Cox of ooba home loans also says you should try to settle your debts.
“When banks look at a potential home buyer’s profile, they check their credit history and risk profile. Although settling an outstanding debt does not automatically guarantee a favourable credit score – as the repayment history of a debt remains on your credit record for two years – good debt management can work in your favour as the banks can only assess what you will do with credit if they can study your repayment track record.”
You should also try to pay the balance owed on your credit card as this has a strong influence on your credit score.
“Paying back your credit card balance has a significant impact on your score, as it’s not just about having the credit, but how you deal with it that the banks are assessing,” she says.
Other considerations to make before applying for a home loan
Whether you’re self-employed, a freelancer, contractor, or a part-time worker and you earn an income from one or more sources, or your income fluctuates from month to month, or even every six months, Mfundo Mabaso, growth head at FNB Secured Lending says you will need to show a track record of an income. Bank statements can usually prove this.
“While we recognise multiple income streams, we also need to be a responsible lender when granting credit to customers."
FNB shares four key considerations for consumers to remember when purchasing a home:
1. Prepare your supporting material
Before applying for a home loan, make sure you have the necessary documents, such as proof of income. Freelancers, contract workers, and piece-job workers must have documentation that confirms the source of income. If you are a gardener or domestic worker with multiple clients, each of them can write a letter or an affidavit confirming that they are using your services, for how long, and for what fee.
2. Check your creditworthiness
A good credit history increases your chances of getting a home loan. Credit bureaus will keep track of your personal credit obligations and rate your debt repayment performance using a credit score chart that shows how well you manage your debt. Always make payments on time and in full.
3. Get pre-approval
A home loan pre-approval helps you to shop with confidence knowing how much you potentially qualify for. A pre-approval is a good indicator of the amount of home loan the bank may grant you. This also means that when you go house-hunting, you are looking at the right price range for your budget.
4. Save for a deposit
While a bank may still grant a 100% home loan with no deposit required, we recommend that first-time home buyers consider putting down at least a 10% deposit to ensure that their home loan repayments are manageable. A deposit increases your chances of getting a home loan because it demonstrates that you are financially responsible.
To find your perfect home, search IOL Property.
IOL BUSINESS