Financial questions to ask
15 October 2015
Since the introduction of the Credit Act consumers have needed to be financially prepared before applying for a home loan. Banks and financial institutions will perform extensive research on a bond applicant’s financial history before they approve the application. Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that it is vital for consumers to assess their financial situation and know the answers to the following questions before they meet with their bank and apply for finance:
What is your credit score?
According to Goslett, it is important for potential homebuyers to know their credit score and take a look at all the items on their credit record to ensure that there are not any mistakes or unexpected issues. Consumers are entitled to a free credit report each year, so they should be sure to check it. “Consumers need to ensure that any accounts or bills are kept up-to-hat have ended up in collections are paid and sorted out before they apply for finance. Any default or slow payment will have a negative impact on the consumer’s credit score, so it is important to make payments timeously,” advises Goslett.
What is your annual income?
A consumer’s income will determine the bond amount that they qualify for. For this reason, Goslett says that it is important to include any bonuses or annual investment returns when making this calculation. Annual tax return documentation will assist the applicant in determining their actual yearly income.
How much debt are you in?
Home loan amounts are largely determined by the amount of disposable income the applicant has available, so where possible consumers should try to pay down their debt levels. “Before applying for a home loan, an applicant should tally up their account payments, credit cards and other monthly payments. This information will be required by the lender in order to determine the applicant’s debt-to-income ratio, which will be used as a tool to determine the appropriate bond amount,” says Goslett. “Having a lower debt-to-income ratio will be highly beneficial to a consumer who wants a higher bond amount.”
What is your financial worth?
Banks will want to see documentation that relates to any assets, such as vehicles, investments and income-generating properties. Goslett says that all of these aspects add to the applicant’s nett worth and will have a bearing on the amount that the bank is willing to grant.
What kind of deposit can you put down?
In most cases the bank will require the applicant to put down a deposit. Depending on the situation, the required deposit can vary from 10% to around 30% of the purchase price of the property. Goslett says that applicants will also require additional funds for all the costs associated with a property purchase such as transfer fees, attorney fees and bond costs.
What can I afford?
Ideally the monthly house payment, which includes the bond, interest, taxes and insurance should not take up more than around 30% of the applicant’s income before taxes. “Potential home buyers will be able to get an idea of their affordability levels from an online bond calculator or with the help of a financial professional. Bond origination companies such BetterLife Home Loans will be able to provide potential homebuyers with a guideline as to what bond amount they can comfortably afford,” says Goslett. “Financial preparation is the key to homeownership readiness and will make the bond application process far smoother,” he concludes.