Preparing for the house hunt? Pre-approval should be part of your plan
There's a growing trend in South Africa towards home loan pre-approval, with both buyers and sellers placing far more prominence on financial preparedness. 'Pre-what?' you ask? Let's unpack that for you.
Pre-approval should be the new 'to-do' on your home-buying checklist, before you even begin drooling over all those lovely dream homes.
Pre-approval actually speeds up the home-buying process: it gives you an accurate measure of your purchasing power, so you can narrow down your hunt to the properties you can actually afford to buy. And this will also prevent you from buying way beyond your budget, pushing you into unmanageable debt.
On top of this, if you attach a pre-approval certificate to your offer to purchase (OTP), you get instant clout at the negotiating table, because sellers know you're serious. And getting pre-approved dramatically improves your chance of getting your home loan approved, so sellers won't have to worry about you securing a loan. It's win-win for both buyer and seller!
It's important, though, to realise that once you've been pre-approved, you can't go off on a wild shopping spree, maxing out your credit card and putting yourself in debt. You actually need to avoid making any significant changes to your financial and credit profile until you have finalised your property purchase.
You also need to keep on paying your existing bills, from the time you were pre-approved until the final transfer of your new property. In all the excitement of finding and buying that dream home, people often forget bills or pay late — and this could compromise your credit rating.
Says BetterBond CEO Carl Coetzee, 'You need to be careful not to get into overdraft on any of your accounts, and you need to make sure that your debit order payments are left as they are. Your pre-approval is a "snapshot" of your financial situation at a particular point in time, and you need to stay as close to that picture as possible, until your actual home loan is granted.'
That's why buyers shouldn't apply for any new credit in the time between the pre-approval and the transfer. Lenders will do a further credit check before the final approval of your loan application and, if you've opened new accounts, that could cause a delay while your status is being checked.
More seriously, if you've bought something major on credit, lenders will have to factor the additional monthly repayments into your debt-to-income ratio, as required by the National Credit Act, and that could result in you not getting that loan after all. Alternatively, your credit score and risk profile could change because of the new debt you've taken on, and that could mean a change to the interest rate you'll be charged on your home loan.
In fact, says Coetzee, 'buyers should even be careful about paying cash for large purchases at this time, or using cash to pay off debt, as that could leave them with lower reserves to cover the deposit on their home purchase, along with the transaction costs. This could once again change the lender's assessment of their financial situation when it comes to actually approving the loan.'
Along with this — and if you can avoid it! — you should also try not to change jobs after getting your Pre-approval Certificate. Even if it seems like a good career move, the bank would have to verify your details all over again, and they might well require a few months' worth of payslips to prove your new salary. This could delay your loan approval even further.
Finally, although adding to your assets shouldn't be a problem, you should keep records of any unusual deposits into your bank account at this time. If you receive a bonus or a gift of cash, or sell some shares or other assets, you must be able to prove where the money came from.
And remember, most certificates are only valid for three months, precisely because the financial position of prospective buyers can change over time, so both buyers and sellers need to check the dates on any pre-approvals.
In short, every move you make with your money will have some sort of impact on your home loan prospects, so you should consult your bond originator before you do anything dramatic. However, everyone will agree that getting pre-approved is the best preparation for purchasing that dream home!