In the pursuit of homeownership, the dream of securing a home loan is a crucial step. However, the path to approval is not always smooth, and potential borrowers often find themselves facing rejection. We take a look at several factors that can lead to a home loan application being turned down, which further highlights the importance of meticulous preparation before approaching lenders.
1. Managing Debt and Income Ratio
One of the primary considerations for lenders is ensuring that borrowers do not become over-indebted. If your existing debt and monthly obligations consume a significant portion of your after-tax income, it signals to lenders that you might struggle with home loan repayments. Prospective borrowers must carefully assess their financial situation and aim for a healthy balance between income and debt.
If you don’t have a budget or you are not good at keeping yours up-to-date, now is the time to get a better understanding of your spending.
Start by determining all your income sources and totaling these amounts into one number. Once you have this number, use your bank statements and credit card statements to determine how much you spend on fixed payments (such as car payments, school fees, medical aid, etc) and optional spending (everything that you don’t pay a fixed amount on every month) List all the fixed expenses, and the average you’ve spent on them for the past three months. Categorize each optional item in groups such as food, transport or petrol, entertainment, clothes, baby supplies, household, travel, transportation, etc. List each group on your spreadsheet, with the average you’ve spent on each over the past three months.
2. Maintaining a Strong Repayment Track Record
While having no defaults on loans is crucial, a habit of paying bills late can adversely impact your credit record. Lenders scrutinize your payment history, including credit cards, store cards, car repayments, rent, and other financial commitments. To enhance your chances of approval, a track record of timely payments for at least two years is recommended.
3. Stable Employment History
Lenders prefer borrowers with a stable employment history, ideally spanning two to three years. This stability provides assurance regarding the ability to meet long-term financial commitments. Self-employed individuals may face additional scrutiny, necessitating meticulous record-keeping of income and expenses.
4. Sufficient Cash Reserves
The days of securing loans for 100% of the property purchase price are waning. Lenders now expect borrowers to contribute a substantial cash deposit. Whether from savings or equity from the sale of an existing property, having enough cash on hand is crucial. Additionally, lenders want assurance that borrowers can cover transaction costs like transfer duty, legal fees, and bond registration fees.
Learning from Previous Rejections
Previous loan rejections leave a mark on your credit history, making it challenging to secure approval from other lenders. Taking proactive steps, such as paying off debt and establishing a consistent track record of timely payments, is essential to improve your creditworthiness.
Take a proactive approach by seeking pre-approval through a bond originator. This preliminary step allows individuals to identify and address potential issues before embarking on the house-hunting journey. Pre-approval not only streamlines the home-buying process but also provides a clear understanding of the budget, empowering borrowers to make informed decisions.
Original Article: https://www.myproperty.co.za/news/market-and-opinion/a-guide-to-avoid-home-loan-rejection-13-12-23
