Buying a home is one of life’s major events and there are few experiences quite as exciting as acquiring a space to call your very own.
However, buying property is also a huge financial commitment accompanied by voluminous financial criteria, legalities and paperwork, all of which can not only put a damper on the experience but also scupper your goal completely if you don’t have your ducks in a row.
This is according to Jill Lloyd, Area Specialist for Lew Geffen Sotheby’s International Realty in Claremont and Lynfrae, who advises that buyers should always get a head start on the financial application before they even think of beginning the search for their dream home.
“Obtaining bond pre-approval not only provides the prospective homebuyer with the peace of mind that their credit record is in good standing and that they are considered a viable credit risk, it also arms the them with the knowledge of how much they can afford to spend and the type of bond deal they can expect from a bank.”
She adds that pre-approval also gets the application process started, which means that the transaction can be more swiftly concluded once buyers have found the home they want. Bond originators provide this service free of charge to prospective home owners.
So what exactly are the criteria for a successful bond application?
Kay Geldenhuys from ooba, South Africa’s largest mortgage originator, says: “The two most critical requirements are a good credit record with a track record of repaying contractual debt responsibly, and being able to afford the monthly bond installment”.
“Banks will require proof of income and will also ask the home buyer to provide them with an income and expenditure statement which indicates that there is sufficient net surplus income to service the bond once all existing debt commitments and household expenses have been accounted for.”
Geldenhuys adds it is important that the property being purchased is in good standing and is situated in a suburb where prices show steady growth.
As banks are legislated by the National Credit Act to only advance credit to consumers who have a good credit record and have proven ability to repay debt responsibly, a bad credit record is quite literally a deal-breaker.
She says: “Although the Credit Amnesty Bill implemented on 1 April 2014 stipulates that credit bureaux must now automatically remove paid-up judgments and paid-up adverse information listings, banks still have access to payment profile information which displays payment histories”.
Banks also generally disqualify applicants who have previously been declared insolvent and Geldenhuys says that only in exceptional cases will they consider approving finance for a rehabilitated insolvent.
Another factor which can count against an applicant is a home buyer who has high credit facilities available on credit cards, retail accounts and access bonds but does not utilise them. Although one would expect this to count in the applicants favour, the opposite is, in fact true.
Geldenhuys says: “Banks will automatically include the instalment on these high unused credit facilities in their affordability calculation, with the rationale being that the applicant could at any stage max out his/her credit facilities. In terms of the National Credit Act, affordability of all credit facilities, used or not used, has to be proven.”
She advises that before applying for home finance, applicants with unused or seldom used credit facilities with high limits should either reduce the limit or close unused accounts in order not to prejudice affordability for a bond.
Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty cautions that whilst pre-approval is definitely a green light to start the search for perfect home, banks will also conduct their own assessment of the bond applications, which includes the valuation of the property to ensure that it provides the right level of security for the bond.
He also advises home buyers to save for a deposit as the chances of securing bond approval with a deposit is far greater than applying for a 100% bond.
“Banks are still cautious about approving 100% bonds and it is anticipated that they will become even more so in the face of the poor economic growth and increasing interest rate cycle that South Africa is currently experiencing”.
“Another advantage of having a deposit is that banks are likely to offer applicants a more attractive interest rate than if they were successful in applying for a 100% bond.”
Geldenhuys warns that buyers should not forget to factor in the additional costs of purchasing and financing their new home, with transfer costs, bond registration charges and the bank’s fees being the primary expenses that should be factored into the budget.
“Transfer and bond registration costs are variable as they are linked to the purchase price of the property and the size of the registered bond amount, respectively”.
“The bank’s initiation fee, which is a once-off administrative fee, is prescribed by the National Credit Act and is currently R5 700. Banks also charge every borrower a prescribed R57 monthly service fee once the bond is registered.”
Geldenhuys says that although the initial gathering of documentation and information can take time, once the bank has received a fully completed application and confirmed that the homebuyer meets the criteria, approval is quick and should take no more than five days, provided the bank is able to promptly gain access to the value the property.
However, Lloyd says that while the approval process should be a matter of days, she has witnessed lengthy delays and has seen more than a few deals fall through due to tardy mortgage applications.
“I cannot emphasise enough how important it is that applicants, especially first time buyers, take the time to do their homework”.
“This includes discussing the entire application and sale process and banks’ lending requirements with a professional and ensuring that they are pre-approved for finance before searching for a property.”
She also cautions buyers against withholding information.
“Not providing a bank with a full disclosure of their financial position is another reason for applicants being turned down”.
Lloyd concludes that consulting knowledgeable and experienced property finance specialists and estate agents is essential to successfully and seamlessly navigate the potential administrative minefield that property investment entails.
“If you’re incorrectly advised during this crucial process by someone who lacks knowledge and experience of the process, you could end up being rejected by every bank and losing the chance of being a home owner. Working with reputable agents and bond originators is crucial.”