The precise criteria banks use to decide whether or not to approve a home loan are something of a closely guarded secret, but that doesn’t mean we are completely powerless to increase our chances of success. Factors like credit ratings are well-known to play an important role in the strength of applications. Marc Hendricks, Western Cape Regional Manager of Rawson Finance – the Rawson Property Group’s in-house bond originator – explains why this is, and shares his top tips on achieving a spotless credit record to get the best possible home loan offer.
“There are two sides to a bank’s decision on whether or not to grant a mortgage,” says Hendricks. “The first is the risk to the applicant – can they actually afford the mortgage in question. The second is the risk to the bank – how reliable is the applicant, and can they be trusted to consistently service their loan. Your credit rating can be a vital component in satisfying the latter.”
There are several ways you can ensure your credit rating is top notch, but Hendricks warns that minor indiscretions can come back to haunt you as much as two years down the line.
“Banks take a full two-year period into consideration when researching your credit history,” he explains, “so it’s important to maintain a clean record for as long as possible before you plan on applying for any sort of loan.”
To help you do just that, here are Hendricks’ top five tips.
Build a credit record (if you don’t already have one)
Not having a credit rating can be almost as much of a problem as a poor credit rating, since banks prefer to lend to applicants with a proven track record of responsible debt management.
“No credit record isn’t guaranteed to disqualify you from a loan, but a healthy record is guaranteed to work in your favour,” says Hendricks. “I certainly wouldn’t advise you go out and get a bunch of credit cards or store accounts for things you don’t need, but it might not be a bad idea to use a credit card for essentials like groceries, by putting your cash into the credit card before buying”.
Pay on time
Slow payment and non-payment both count against you when you apply for a loan.
“You can be considered a slow payer for being as little as a day late, even if it’s only once in a while,” says Hendricks, “which is why it’s absolutely essential that you pay your accounts on time, to the exact day.”
Never let a debit order bounce
Most bond payments are made by debit order, so it’s understandable that banks would take a dim view of applicants with a poor history in that regard.
“A single bounced debit order can cost you much-needed points on your application,” says Hendricks, “so always make sure you have enough money in your account to cover automatic payments like insurance each month.”
Have your salary paid into your bank account
Apart from being the easiest way to ensure you have enough money to cover debit orders, having your salary deposited into your account also establishes a record of your income.
“This helps the banks get an overview of your income versus expenses, and assess how responsibly you manage your finances,” says Hendricks.
Never let your bank account go into overdraft
Even bank accounts with no credit facility often allow a small overdraft to enable payments that exceed your available funds by a minimal amount to be completed without hassle.
“Overdrafts are a courtesy service from banks to minimise the inconvenience of realising halfway through a payment that you’re R20 short,” explains Hendricks, “but it’s not something they like to do, and they will very quickly cause a fuss if you don’t rectify the matter within days. Any history of overdraft, even if its minor, will be a black mark on your record, so it’s always best to completely avoid this option if at all possible.”
Of course, being human, it’s easy to make a mistake here and there that leaves your credit record less than spotless. Does that mean all hope for bond approval is lost?
“There is always hope,” says Hendricks, “no matter how dire the situation, and this is where a bond originator can really save the day. Not only do we help you build the strongest possible application, but we can personally advocate for you to the bank’s decision-makers, explaining the reasons behind any black marks on your record so that you’re not unduly penalised for your mistakes.”