Buying your first home? This is what you need to know about home loans
Have you decided to take the plunge and hunt for your first home? Congratulations! It’s a momentous life event! But before you start, there’s one big hurdle to tackle first: your search for a home loan.
First things first: do the maths
Before you even begin looking for your dream home, you need to figure out what you can afford. Purchasing a home is a long-term financial commitment and you need to make sure you can carry the costs associated with a bond – and beyond!
To get started, visit your financial institution’s home loan calculator. This will give you key ballpark figures to work with, like how much you can afford to borrow and what your monthly repayments would be. Typically, your bond repayments should not exceed 25–30% of your gross monthly income (your income before tax deductions).
But wait, there’s more!
Many first-time buyers assume that the listed house price is the total sum of money that you’ll need. But did you know that there are additional once-off cash costs that come with buying a property? These include a deposit (unless you can secure a 100% home loan), bond registration fees and transfer duties.
Did you know that there are additional once-off cash costs that come with buying a property? These include a deposit, bond registration fees and transfer duties.
On top of these once-offs, you also need to consider the extra costs that come with owning a home. You may already be on top of the rates, taxes and levies situation, but remember that your monthly expenses will now include things like building insurance, security and ongoing maintenance, plus property-specific extras such as garden services or pool upkeep.
Once you’ve determined the total amount you can comfortably afford, it’s time to get the home loan process started. But what do you need to do before making it official?
Do I qualify for a home loan?
Having a regular, secure monthly income makes you a pretty attractive candidate for a home loan. If you’re self-employed or if you have a variable or unpredictable income, it can be more difficult – but not impossible – to qualify for a bond. This is because lenders like to have some kind of guarantee that you’ll be able to keep making your repayments month after month.
It’s not just your income that financial institutions will look at though. Other factors include:
Your credit score. Your credit score is determined by your debt history and is a measure of how good you are at paying back your debt. You can get a free personal credit report once a year at any national credit bureau (for example, TransUnion or ClearScore). If your score isn’t quite where it needs to be, work on improving it before applying for a home loan. The simplest way to do this is to clear any lingering consumer debt (think smallpersonal loans, credit cards and store cards).
Cash in hand. While 100% or even 105% bonds are available (more on this later!), you’re more likely to secure a home loan if you’re able to put down a cash deposit. A deposit not only makes you a more desirable candidate to the lender, it will also bring down your monthly repayments and reduce the overall amount you owe to the bank.
A deposit not only makes you a more desirable candidate to the lender, it will also bring down your monthly repayments.
Once you’ve submitted your bond application, you will – hopefully – receive ‘approval in principle’. This means your application has technically been successful, but the bank will still need to visit and evaluate the property to determine if its valuation represents its true worth. Once the bank is satisfied, your bond will be approved and a bond attorney will be instructed by the bank to register the bond.
Hold up. Did you say I can get a 105% loan?
Not every first-time homebuyer is able to put down a deposit. In that case, you can try to secure a 100% or even 105% loan.
A 100% loan will cover the entire cost of your property, but you’ll still need to save up to cover the bond registration and transfer costs. Getting a 105% home loan means you’ll be able to borrow enough to cover the price of the property and all the associated costs.
100% and 105% home loans were introduced to the South African market in an attempt to make home ownership a realistic option for young homebuyers. They are typically reserved for first-time buyers and for properties that cost less than R1.8 million.
While getting a 100% or 105% home loan may seem a more appealing route than saving up for a deposit, keep in mind that the monthly repayments and overall interest paid will end up being higher. To qualify for a 100% or 105% home loan, you’ll also need an excellent credit score and the ability to afford the instalment should interest rates increase.
100% and 105% home loans are typically reserved for first-time buyers and for properties that cost less than R1.8 million.
I’ve found a property and am ready to apply for a home loan. Which documents do I need?
Once you’ve done all your homework on your finances, it’s time to get your docs in a row before you approach lenders.
First up, you’ll need:
- Proof of residence
- Offer to purchase (if applicable)
- Document exchange consent (DEA) form, which gives your financial institution permission to share your financial history
If you’re self-employed, you’ll need to come armed with the following documents:
- Most recent two years’ business financials, certified by an auditor or registered accountant
- Three consecutive months’ bank statements
- Statement of personal assets and liabilities
Depending on your employment status, you’ll need to provide the following proof of income.
If you’re permanently employed:
- Fixed monthly income: most recent payslip (not more than two months old)
- Variable monthly income earners: six most recent payslips
- Fixed weekly and fortnightly earners: four most recent payslips
- Variable weekly and fortnightly earners: 24 most recent payslips
- Three consecutive months’ bank statements
Okay, but who should I apply to?
You’re not obliged to take a loan from your own bank. In fact, it’s encouraged that you shop around for the best deal. This could involve a lot of paperwork for you, but BetterCompare has taken the hassle out of the home loan application process! Our home loan comparison service will send your application to up to nine banks. You’ll receive quotes within three to five working days. Simply compare the quotes to make the best decision for you!
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