With lower interest rates and motivated sellers, home ownership has never been more accessible. However, very few of us are able to finance the purchase without the help of a home loan.
And while Ooba Home Loans reports that 80.7% of its applicants successfully secured home loan financing in the first quarter of 2021, 15% of applicants are rejected due to lack of affordability and poor credit rating.
Of those rejected homeownership hopefuls, no less than 42% were turned down by their own bank.
As a result, many applicants feel discouraged and believe that their journey to homeownership is automatically cut short.
The Myth of Personal Banking
“When applying for a home loan, you would assume your first stop would be to apply directly to your own bank. After all, you probably have a great relationship with them and they are normally your first point of contact,” said Rhys Dyer, Managing Director of Ooba Home Loans.
“However, banks’ lending criteria are governed by the National Credit Act and therefore there is no guarantee that they will be able to approve your home loan. Based on this, we recommend spread your risk by using a home loan comparison service to increase your chances of being approved – all at the best possible interest rate.
A home loan comparison service will apply to multiple banks on your behalf. “In our own experience, we’ve been successful in securing home loan financing for about two out of four applications that were initially declined by their own bank. In effect, each bank uses a different scorecard – or lending criteria – when evaluating an application,” Dyer said.
Reasons for refusal and next steps
It’s crucial that a rejected candidate take steps to improve their financial health, Ooba said.
When banks are assessing whether to approve a home loan, their first step is to check your credit score. “A bad credit rating is the most common reason for rejection. Fortunately, there are steps you can take to improve your position before you apply again,” Dyer said.
If your credit score is deemed poor – below 600, Dyer advises you to obtain a copy of your credit report from the credit bureau.
“If you identify errors on your credit report, the credit bureau must be notified and you must then take the necessary steps to correct the information displayed on the report. This will involve engaging with the credit grantor who provided the credit bureau with incorrect data.
“If the information is correct and your poor credit rating is the result of an impaired credit report due to bad debts or no credit history, further action will need to be taken,” a- he declared.
Ways to improve your credit score
If your poor credit rating is due to a lack of credit history, which means you have no record of your ability to take out and repay a loan, you should start by opening small retail accounts or a cell phone contract. These debts must be repaid on time and in full (if not a little more) each month.
If you have a low credit score due to a bad credit history, you should try to settle your debt as soon as possible. Dyer recommends the following tips to help boost your credit score:
- Pay your bills on time.
- Settle and close accounts.
- Pay more than the minimum payments on existing debts.
- Avoid requesting additional credit over this period.
“If you’re applying for a home loan alongside a partner or if you’re married in community of property, your partner will need to follow the same steps,” Dyer said. “Once you’ve started the credit repair process, you should continue to check your credit score every three to six months and make any necessary adjustments,” he said.
Dyer’s final tip is to work with a trusted home loan comparison service. “Before you start the home loan journey, find a reputable service provider, know your credit score, and get a prequalification certificate. This will give you a good indication of what you can afford and if you are potentially eligible for a loan.
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