Understanding your credit score and its role in bond approval
When you finally decide to step onto the property ladder and approach the bank for finance, there are a number of factors that will be considered before your application can be approved.
Banks will generally take into account the location and market value of the property, the deposit you are willing to put down, as well as your affordability and credit score.
“What many first-time home buyers don’t realise is that a poor credit profile or no credit profile affects the overall scoring on an application, and can lead to a decline, a lower offer on the loan amount requested, or a higher interest rate, as the risk is perceived to be higher,” says Stanley Mabulu, head of sales at FNB Home Loans, official Finance Zone Sponsors of the Property Buyer Show in Gauteng.
Before applying for a home loan, it is essential that you first understand how a credit profile works and whether you have a good or poor one, or if it exists at all.
Mabulu says having no credit record, or a poor one often proves challenging when applying for a home loan. Banks perform comprehensive credit checks on each home loan applicant, as the repayment on a home loan will most certainly be the client’s biggest monthly commitment. Understandable then that the bank needs assurance that you have been keeping up your monthly repayment commitments as this will be a good indication whether you will do the same on your home loan.
“Consumers are always encouraged to take corrective action on poor credit profiles prior to applying for a home loan, bearing in mind that certain profile challenges can take anywhere from six months to two years to reflect an adequate improvement. Individuals with no credit profiles are advised to start building their profiles responsibly, without taking on more debt than they can keep up with. For example, getting an account at a local clothing store or applying for a credit card that you then make small purchases with and repay as quickly as possible,’ explains Mabulu.
According to the National Credit Act, South African consumers can access their credit profiles for free once a year from select credit bureaus, namely TransUnion (ITC), Experian, XDS and Compuscan.
“We encourage consumers to take advantage of this and establish if there are any defaults or judgements listed against their names, or if there is any information which has been incorrectly listed on their profiles,” says Mabulu.
Banks also use your credit and risk profile as one of the measures to determine the interest rate that you will be charged on your home loan. To get this information, a bank normally does an enquiry into a customer’s bureau profile with the written permission from the customer in order to properly assess the risk of borrowing.
“A first-time home buyer could either have a wealth of bureau information, from which a bank could have an indication of the risk; or have a thin bureau profile, meaning that a bank would not know a lot about this customer. Less information about the customer increases the level of uncertainty on the extension of credit,” concludes Mabulu