Applied for a bond? This is what your bank is looking at
There are things buyers should not be doing when applying for a bond; things that could impair their chances of obtaining the finance they require. This is according to Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, who says buyers should avoid common financial missteps to ensure they maximise their potential for bond approval.
A low credit score will impact buyers in two ways: It will negatively affect their chances of bond approval, and if approved, it will have a bearing on the interest rate the bank is willing to provide them on the loan. “Aspects that will have an adverse effect on a buyer’s credit score include missed or late payments, so it is essential to keep all credit lines current,” says Goslett. “Payments must be made on time and every month. Prospective home buyers should avoid applying for any additional accounts or credit cards, as multiple credit enquiries will impair their credit scoring.”
Buyers should try to get rid of existing debt or at the very least reduce it to below 30% of the credit limit. “Debt weighs heavily on a consumer’s credit scoring, so it is highly advisable for potential buyers to pay off any consumer accounts that are due, before applying for a home loan,” he says. “Having a high debt-to-income ratio affects buyers’ affordability levels, which will have a bearing on the bond amount they will be approved for – if they are approved at all. Disposable cash is a key element to bond approval success.”
Spending big amounts of money on credit before applying for a bond will severely reduce a buyer’s chances of getting a bond. Ideally, it is best to avoid making any large credit-driven retail purchases or buying a big-ticket item such as a car, before applying for a bond.
When it comes to big-ticket items credit is not the only thing to be weary of, as large cash withdrawals will also raise concern with the lender. Substantial cash withdrawals may require an explanation during the bond approval process.
Lenders take the length that an applicant has been at their current job into account when processing a bond application, so it is best to avoid interrupting stable employment during the home-buying process. “Someone who moves from one job to the next within a reasonably short period of time can be seen as a credit risk. Banks generally like borrowers who have a stable employment record with at least six to 12 months or more in the same job with a regular income,” says Goslett. “While it might be unavoidable due to the buyer’s circumstances, it is best to hold out on changing jobs or hold out on buying property.”
Just because the bank is prepared to offer a certain bond amount to the buyer, it doesn’t mean that they should buy a home for that amount. It is important to keep in mind that there is more to homeownership than just a bond repayment, such as rates and taxes, maintenance costs and possibly levies. Another consideration is possible interest rate hikes during the term of the bond. Goslett says that buyers should try to stick within the price range where they can comfortably manage the total monthly home expenses and have something left over. By looking at homes below their maximum limit, buyers will also be able to compete with other buyers in a multiple-offer situation.