Few things compare to the excitement of purchasing your first home. However, if you are not prepared before you put in your first offer to purchase, you may be left disappointed, say agents from the Seeff Property Group.
The majority of first-home buyers require home loan finance, and it can be a real let down after finding your dream home, and getting an offer to purchase accepted, that you are unable to secure a home loan.
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Seeff says it is important for prospective first time buyers to understand what might have contributed to this, and how you can overcome it.
A poor credit score (below 610) is often the most common reason for rejection. A copy of your credit report should enable you to work through and identify problem areas for improvement. Things such as a high debt burden, or missed payments will affect your score. You can then implement corrective actions, but will need to give it a few months before trying for a home loan again.
Affordability is another big issue for home buyers. The banks will assess whether your income can adequately cover the monthly repayments. Generally, the repayment amount should not be more than 30% of your gross income. If there is a shortfall, you will need to look at reducing some of your debt. Alternatively, you could look for a lower priced property, or consider paying a deposit to bring down the monthly payment to within the 30% range.
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A high debt-to-income ratio is another factor which will most certainly count against the buyer. This is an important aspect that the banks look at. If you are overextended, it might send a red flag in terms of your ability to manage your debt. A high debt ratio also means you may not have enough surplus income to absorb any sudden financial strain such as an unexpected interest rate hike (not that it is a current risk).
The property valuation might also influence the bank’s decision to decline the requested loan amount. The bank might not assess adequate value in the property, and may return either an outright decline, or an offer which is below the requested amount, for example only 80% of what you applied for. If you are unable to fund the difference in cash, then it will unfortunately be a decline.
Seeff says it is vital that prospective buyers do their homework before they start house hunting. Buyers should improve their chances of securing a home loan by ensuring that they manage a low debt to income ratio. While you should pay off outstanding debts, you will need to keep some short-term credit so that you can achieve a good credit score.
Save for a deposit, even if it is just 10% of the asking price. This will indicate that you are willing to invest in your new home and will count in your favour when the loan application is assessed. Don’t forget that you will also need cash to pay for the transaction costs as well as moving expenses and the costs of setting yourself up in your first home.
A home loan prequalification has become a vital first step before you start shopping for your first home as it will provide a clear indication of your affordability range which will save time and frustration. It will also improve the chances of the seller accepting your offer to purchase (provided the price offered meets with their expectation).
Do not go with one bank. Shop around, or better yet, Seeff recommends that you make use of a mortgage originator to greatly improve your chances of securing a high loan to value and potentially, a better interest rate as well, depending on your credit profile.
READ: What's the 'golden' credit score number for bond approval?
To work out how much a buyer can truly afford, RE/MAX of Southern Africa shares the following tips:
- Calculate your debt-to-income ratio to see how much of your income is already committed to debt payments. The money leftover is now your base amount to work out how much you want to pay on a home loan.
- Top tip: are there any debts you could pay off quickly to free up more income?
- Work out how much money you typically spend on lifestyle expenses (consider things like birthday presents, entertainment costs, hair and beauty expenses, etc.) These amounts vary each month, which is why it can be tricky to work out a budget for these items.
- Consider your priorities. For example, if travelling is important to you, then it might bring you more joy to compromise on the size of your home than to compromise on your ability to afford getaways.
- If all else fails and you’re not sure where to start, a common guideline is that your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (including housing costs) should not exceed 36% of your gross monthly income.
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