Where do you start when you begin to think about buying your own home? Is it daydreaming about the kitchen or diligently squirrelling away savings for a deposit? Do you fill out every pre-qualification form you can get your hands on or scrutinise the budget to know your own real affordability?
The excitement of beginning the process of buying your first home can be overwhelming, but it is important to remember that this is probably one of the biggest investments you will make in your life, and this means it requires realistic, responsible planning, starting with your budget and understanding your credit report.
“We all dream of the perfect home, but without careful planning and budgeting, the home-buying process could be a nightmare,” warns Jeannine Naudé Viljoen, executive manager of the Credit Bureau Association. “Forewarned is forearmed – so start by doing your ‘homework’.”
The loan process
Any potential home loan provider will ask for:
- proof of income,
- your expenses,
- at least three month’s transactional bank statements,
- and permission to access your credit report.
This is all part of the National Credit Regulator-mandated affordability assessments, as part of responsible lending. They will then decide if they want to offer you a loan and for how much. This is based on their own appetite for risk and internal processes, and a lot of it is based on the verification that the credit report gives them.
Know your credit score
Every credit active consumer has a credit report with a credit score. If you have a store account, credit card, bank loan, or other type of formal credit, this means you! The report includes details of how you manage your own personal debt, as well as an estimation of your total debt exposure, your credit accounts, and your payment profile. It tells credit providers if you have a history of paying on time and in full, if you have missed payments, and whether you have any unpaid judgments against you.
Given this, it is clear that this is an important document, but so few first time buyers know what information theirs will reveal. And if you don’t know, you can’t fix any problems – problems which many result in you not qualifying for a loan or not getting the right deal for you.
The National Credit Act makes provision for consumers to access this information – their own credit report or profile – free of charge every year. There are five credit bureaus who list consumer credit information, so you can get five free reports a year.
How do I improve my credit score?
Unfortunately, a poor credit score may make it difficult to get a loan – but you can take steps to improve your score.
- Make sure that your credit report is accurate. Is your ID number right? Is your contact details and address up to date? Is there an account listed that you don’t recognise? You are entitled to dispute any inaccurate information with the credit bureau.
- Then, you need to ensure that you bring all accounts up to date, and develop a history of paying consistently. Although bad behaviour (i.e. non- or late payment) can stay on your report for up to five years, good behaviour is also taken into account, and will help to balance out and improve your score.
- If your budget allows, try reduce your debt exposure by making some lump sum payments, or paying over the minimum amount each month.
The next step is to draw up your budget – a realistic capturing of your income and expenses. Best practice is to commit no more than a third of your income to servicing (aka paying) your bond. That’s 33% of your net take-home income, after expenses and taxes are factored out.
“We also recommend you give yourself some ‘wriggle room’, just in case the interest rates increase or your living expenses change – such as when your family starts to grow. Don’t forget to factor in rates and taxes, or levies in an estate,” says Jeannine. “Ask yourself the hard questions. Will you be able to service your bond if you or your spouse is retrenched?”
For extra points
Other good practices before and after qualifying for a home loan include:
- saving up for a deposit to reduce your overall debt;
- paying any initiation fees up front with cash, rather than through debt;
- and paying in more on a monthly basis which can either be withdrawn and used later (through an access bond) or go towards shortening the length of your bond agreement.
Now, armed with knowledge, an improved credit score, and a detailed budget, go forth and claim that ‘home sweet home’.
For a list of all credit bureaus and their contact details, visit cba.co.za