What do I need to know about getting a home loan?

There are seven factors to consider on the way to a successful home loan application.

1.  Affordability

Before granting you a loan, a home loan provider must consider how much you can afford to repay.

You need to draw up a budget that takes into account your current expenses including:

• Your fixed monthly costs, such as what you may be paying now in rent, medical scheme contributions, child support obligations, school fees, car loan or other debt repayments, mobile phone costs, life insurance and short-term insurance premiums;
  
  
• The average of your variable monthly expenses - groceries, petrol, entertainment, car maintenance, clothing, gifts, etc – over at least the past three months.

Keep it realistic, so you will have a good idea how much you can afford to repay, while also being responsible for rates, water, electricity, sectional title levies (if you buy into a complex), home insurance and security. Read more: How does a credit provider determine how much credit I can afford?

Most banks and bond originators (intermediaries who specialise in securing bonds for consumers) offer online calculators that will give you a good idea of the size of the loan for which you are likely to qualify.

You can also apply for home loan pre-approval to be sure your search for a home is focused on what you can afford. Pre-approval is not a commitment by the home loan provider, but it is a valuable indicator of what you can afford.

Bear in mind that interest rates can rise unexpectedly, and that other fixed and variable costs will increase from time to time, so apply for a loan that leaves you some wriggle room – ideally, target about 20 percent less than the maximum you could afford immediately.  Read more: Homeowners need to be prepared for interest rate hikes and other costs

2.  Eligibility

What do home loan providers look for before granting a home loan?

• A clean credit report that proves you can manage credit responsibly is essential. You can access your credit report free of charge from any credit bureau to get an indication of your chances of getting a loan. Although credit-scoring models vary, as a general rule you need a credit score of 600 or higher to be eligible for a home loan. Read more about credit reports here.

• You need to be 18 or older and working, with six months of unbroken employment, or two years of working for yourself.
  
  
• Whether you are able to pay a deposit - this gives you the best chance of your loan being approved. Not only does a deposit reduce the sum you need to borrow, but it demonstrates that you are able to save and/or manage money.

3.  The documents

When you find the right home, the estate agent will help you draw up an offer to purchase and present it to the seller.

The offer will include a “suspensive” clause making the sale conditional on a loan being granted.

If the seller accepts that condition (and/or any other “suspensive” clause) and signs the contract, it becomes binding on both parties and you can submit your loan application/s.

Loan approval usually takes between five days and two weeks. This leaves the seller in limbo. The offer to purchase may therefore include a 72-hour clause to protect both parties. The seller can carry on marketing the property while your home loan is being considered, but may not accept a better offer without giving you, the buyer, 72 hours to finalise the loan or arrange other finance.

Home loan providers require certain documents to be submitted with the application – usually some combination of these:  

• The offer to purchase signed by both parties.
  
  
• Identity documents for all the applicants.
  
  
• Proof of income for all applicants: pay slips or bank statements for the previous three months if you are earning a steady salary, or six months if your income is variable because of overtime, commission, and so on.
  
  
• Proof of your present address in the form of an electricity, water or phone bill.
  
  
• If you are married (and even if the home loan application is in the name of only one of the parties), you need to submit your marriage certificate, plus your antenuptial contract if you are married out of community of property.
  
  
• Proof of assets (including savings) and debts to complete the picture of your financial situation.
  
  
• If you are self-employed, you may need to submit any or all of these:
  
  
  • Bank statements for the last 12 months;
  • Statement of personal assets and liabilities;
  • Annual financial statements for at least two years;
  • Stamped business account bank statements for the previous 12 months.

4.  Which lender?

You can apply to the banks directly. Many offer online applications. South Africa has only one specialist mortgage provider that is not a bank: SA Home Loans.

You can also apply through a bond originator. Bond originators will apply to up to eight banks, compare the offers, and present you with the best ones. The advantages of using a bond originator are:

• They know the market and the requirements of the various banks. Their role is to make sure your application is regarded favourably by the banks, so their guidance can be valuable.
  
  
• They have relationships with the banks, which means they can be more efficient.
  
  
• When the banks know your application is going to their competitors, they are likely to respond quickly and make their offer competitive.
  
  
• Bond originators claim a higher success rate – as much as double the success rate of individuals applying for loans.
  
  
• Best of all there are no costs for you, the applicant. Bond originators earn their commission from the banks.

5.  The loan

You can apply for a loan over 20 or 30 years.  Loans over 20 years are more common, but you may need the longer term to make the repayments affordable.  The longer the loan, the more interest you will pay over the term of the loan.  

Your age may also be taken into account when a lender decides whether to give you a loan for 20 or 30 years.  Ideally, you should have repaid your loan by the time you retire.  

The bank will also consider the loan relative to the value of the property, which is its security for the loan.  Home loan providers may inspect the property to ensure it is worth at least as much as the loan for which you are applying.

The bank’s calculation of your individual interest rate is based on:

The bank’s prime rate of interest (the starting rate for lending to consumers);

• The level of risk the bank associates with your loan after considering your debt repayment history;
  
  
• The size of your deposit;
  
  
• Your current assets and liabilities.

Home loan interest rates are typically stated as “prime + xx%”, or “prime - xx%” where xx is a percentage and represents the risk factor assigned to your loan.  If the prime rate increases, for example, by 0.50%, your rate increases too, causing your monthly repayments to increase.

7.  Risk of default

If you fall ill, are disabled or lose your job and you are unable to pay your bond repayments for three months or more, your home loan provider can cancel your contract, repossess the property and sell it to recoup its losses.

Credit life insurance protects you against this outcome by paying out a sum of money to cover the outstanding amount of the loan in the case of permanent disability or death. It may also cover your repayments for up to a year in the event of temporary disability, severe illness or retrenchment. Read more: What is credit life cover?

Your loan provider may make this cover a condition of the loan but cannot insist you take out their policy. You are entitled to shop around for the best deal as long as the cover you take out meets the lender’s criteria.

You can also cede an existing life and disability policy to the lender to cover your loan if the policy meets the bank’s criteria.

Remember credit life cover pays out only the balance of the debt, so if you are a breadwinner for a family, you may need life and disability cover for the financial implications of death or disability.