Several factors determine whether you will qualify for a home loan. The most important of these is your credit score, which tells lenders whether you manage your debt responsibly.
This article considers what your credit score reveals, and provides tips for improving your score to help you secure a mortgage.
Tip: Debt consolidation can simplify your debt and improve your credit score over time.
What your credit score reveals
Your credit score indicates your outstanding financial commitments and your monthly payment obligations. This information is used to assess your risk as a lender, and contributes to determining the loan amount you can potentially afford.
As such, it’s one of the main factors that will determine the outcome of your bond application, says Carl Coetzee, CEO of BetterBond. While there is no “golden number” that will guarantee bond approval, the higher your score, the greater your chance of obtaining a loan.
“Credit scores in South Africa generally range from 300 to 850,” Coetzee says. “Some providers recommend a score of above 600 to qualify for a home loan, while others look for 700 or more.”
Coetzee recommends that you draw a credit report from a credit bureau to ascertain your credit score. However, it’s important to note that most lending institutions have their own credit scoring system, meaning that information may differ from one bank to the next.
Rudolph van Wyk, executive property financing consultant at SA Home Loans, says, “From our perspective, there is no score that would allow immediate home loan approval. Scoring is only one of many aspects we look at in assessing a candidate.”
Van Wyk notes that affordability is also a major determinant. “We need to be able to prove that a client can afford the loan we are going to put forward. Additionally, we need to be able to check that, in the instance that interest rates increase, our client will still be able to afford the loan.”
Improving your credit score
Although your credit score is not the only measure of your ability to pay off a home loan, you may find that your application is declined because your credit score is too low.
Fortunately, there are steps you can take to improve it.
Coetzee recommends that you maintain rather than close accounts, since a portion of your credit score is based on the age of your existing accounts.
“Ensure your bank accounts are run well and you do not have unpaid amounts, no matter how small, on your profile,” he says. “Pay off your credit cards, and try not to use too much of your total available credit. Keep your credit card use to less than 50% so you are able to repay the full balance each month.”
Ester Ochse, FNB Money Management product head, says you can keep your bank account in good standing by aligning debit orders as closely as possible with your salary payment date.
“Aim to avoid any missed or late payments, and avoid increasing your credit limit,” she says. “You should also avoid taking on other loans if you are hoping to secure a home loan.”
If your home loan is refused because your credit score is inadequate, obtain a detailed report and seek guidance on how to improve your score so you can apply again.
Tip: Considering a home loan? Register here to view your credit score for free.