Your credit score is the first step in the home loan application process and an important tool with which to access the level of risk you pose to the lender.
Ideally if you’re applying for a home loan, your credit score should be at least 600 or above to receive a favourable interest rate.
“At this level, you should not have any problem getting a loan, provided it is within your means to pay the monthly instalments,” says BetterBond CEO Rudi Botha.
“The higher your score is above 650, the more likely you are able to negotiate interest rate concessions, which in the case of a home loan can save you hundreds of rands a month and many thousands of rands over the lifetime of the loan.”
Don’t underestimate the power of negotiation because you can get the bank to give you a 0,5% concession on your bond.
Using an example of a property bonded at R1,5 million over 20 years, dropping the interest rate by 0,5% would translate into a R6 000 saving over a 12-month period and could shave R120 000 of the interest incurred over the lifespan of the loan.
Here are four credit profile mistakes that could hamper your chances of becoming a homeowner.
- Too many recent inquiries against your credit profile
Be careful about requesting too many quotes for loans or credit as a lot of inquiries is not viewed favourably.
“If your requests are spread over more than a few days, each inquiry will be logged separately and it will look like you are applying for several different loans or other forms of credit,” warns Botha.
“This is one of the reasons why you shouldn’t apply for car finance at the same time as you are trying to buy a home.”
2. Using too much of your available credit
Just because you have a line of credit available doesn’t mean that you have to make use of it all. In fact, it looks so much better if you don’t.
“Your score will be lowered if you max out your credit card every month, even if you pay off the balance on time and in full before the due date,” Botha warns.
“What matters here is how much credit you have available and how much you’re using, or your credit utilisation ration, so you should try to keep the balances as low as possible on all your lines of credit.”
3. A sketchy credit record past or misunderstandings
If you are a repented serial defaulter, your past behaviour – despite having since built up a clean credit record – can come back to bite you hard when you’re trying to buy a house and it could also very well be the reason why your credit score is low.
“We often find, for example, that prospective borrowers have black marks on their credit records from years ago because they forgot to actually close an old bank account and the monthly fees have been mounting up unpaid. Or they may have changed address and missed a bill or two,” says Botha.
4. Not having a credit history
At the end of the day you aren’t going to qualify for a home loan if you don’t have a credit history.
If you’ve been taught (correctly) to save and buy things cash instead of on credit, consider taking out something like a phone contract or a store account just so that you have a record of your payment behaviour. Make sure that this account is paid on time every month and you should be golden.