Even with the worst of the recession behind us, combined with the fact that the banks are starting to marginally relax their lending criteria, getting a bond application approved remains a challenge for many..

The lending landscape has seen dramatic changes over the last few years – practices that were once acceptable have changed in lieu of stricter regulations and controls.  “Stricter lending criteria due to the National Credit Act (NCA) has been, to a large extent, blamed for the decline of the property market in recent years,” says Goslett. However, the truth is that the decline is not solely due to the NCA, but rather as a result of an amalgamation of various factors, including the world-wide recession, the fluctuating interest rates, inflation and so on.”

He says that although it remains much more difficult to get an approved home loan today, it is important to recognise that, to a large extent, it was the NCA that saved South Africa from going the same route as America and the UK when their property markets bottomed-out. “Today, loan underwriting standards remain pretty stringent as the banks are taking every precaution necessary to ensure that they don’t fall victim to another financial crisis.”

Against this background, Goslett discusses the top five points to consider when applying for a home loan to ensure a better chance of approval:

1.)   100 percent home loans

Just over a year ago, 100 percent bonds were all but extinct. They have re-emerged today. There is considerably more risk involved in granting a 100 percent home loan, the lending criteria will be stricter and the overall approval rate on these applications is therefore much lower.

2.)   Affordability

A simple calculation involving an applicant’s gross income, net income and fixed monthly expenses will provide insight into their monthly expendable income. South African credit legislation governing mortgage lending dictates that mortgage lenders may not grant a bond of which the monthly repayments are larger than one-third of your monthly net income.

Most banks work out the amount that an applicant will qualify for using the repayment to income (RTI) of 30 percent in conjunction with the available disposable income. This means that the person with very little outstanding debt will qualify for a considerably higher loan amount as they will have more disposable income. However, those individuals who are already highly geared often won’t be approved for a home loan as their debt-to-income ratio exceeds the NCA’s guidelines.

3.)   Stable income

Often applicants don’t have consistent proof of income for the last three years. Regardless of how good their credit rating and current rate of disposable income is; if they can’t show the bank continued proof of income, loan approval will be tough.

4.)   Credit rating

A less than perfect credit record will negatively influence a bond application and, in extreme cases, bad credit may even lead to bond approval being refused.

Any lender will undertake credit checks on all home loan applicants which will provide them with information on how much credit they have applied for, the state of their credit accounts, how they have been managed and their blacklist-status.

Credit scores aim to predict how likely the applicant will be to honour their credit commitments in the future. To a large extent, loan approvals are based on the applicant’s credit scores, as it is used by lenders to identify the risk in offering them credit.

5.)   Self-employment

More and more South Africans are opting to become entrepreneurs – some because they were made redundant by the recession, others because they believe it offers a better lifestyle and some because they believe they can earn considerably more this way. However, in compliance with the NCA, lenders have to be especially careful about lending money to people who are employed in positions that might be considered “insecure”. As such, self-employed individuals usually struggle to qualify for a bond.

In April 2008 only 24 percent of home loan applications were converted into granted bonds – a radical decline compared to the boom years of 2005 and 2006 where 78 percent of all home loan applications were granted. Since October last year there has been a gradual improvement in the success rate of bond approvals and currently around 50 percent of all home loan applications are successful.

This is mainly due to the banks relaxing their lending criteria to a certain degree as well as the fact that property prices have now adjusted downwards to a “new normal”.

But while the banks have eased up on their lending criteria, it is still important for them to ensure that the loan applicant can afford to meet the monthly repayments.  Therefore, as a property buyer, it is important that you watch your credit rating carefully, save up for a deposit if possible and make sure you have all the necessary documentation at hand when applying for your loan.

Remember by choosing us for a loan, you will get professional advice to make sure you are getting the best deal possible.

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More than 50 percent of home loan applications are still being declined despite many banks relaxing their credit criteria.

The gradual improvement in the residential property market since the second half of last year has been attributed largely to the relaxation by banks of their credit criteria and the reduction in interest rates, enabling consumers to reduce their high debt levels.

Mortgage Plus said yesterday an average of 51.5 percent of its home loan applications were declined last month compared with 50.2 percent in February last year. The ratio of home loan applications that were declined by one lender but approved by another had also hardly changed in the past year.

Saul Geffen, said technical reasons were responsible for the decline ratio remaining the same. He said there had been a higher intake of low- or no-deposit home loan applications, which had changed the mix of applications and resulted in the decline ratio remaining the same.

He said the proportion of consumers applying for 100 percent bonds had jumped to more than 40 percent of its overall applications from 18 percent in September last year.

The overall approval rate on these applications was lower. Nearly half of the approvals on 100 percent bond applications were subject to deposits of 10 percent to 20 percent.

“The decline rate should be understood in the context of the significant increases in application volumes rather than increases in bank rejections.

“Despite lenders having generally increased approval rates, a higher proportion of applications are now not being approved due to an increase in the proportion of marginal applicants who are trying to take advantage of the improved lending environment, particularly 100 percent loans which have stricter criteria to fulfil,” he said.
Statistics showed that the average purchase price of a house increased by 11.4 percent to R895 031 last month from a year earlier and the average approved bond size had risen by 13.9 percent to R721 107 .

The average deposit as a percentage of the purchase price declined to 19.4 percent last month from 21.3 percent in February last year.

Luthando Vutula, the managing executive of Absa Home Loans, said yesterday the volume of home loan applications it received had improved by about 18 percent between September and October last year and continued to increase.

He said Absa only provided 100 percent home loans to the affordable market and not to the traditional market. About 15 percent of the applications Absa received monthly were for 100 percent home loans.

Repossessions had declined from about 50 a month at the peak of the credit crisis last year to less than 35 a month.

Rael Levitt, the chief executive of Auction Alliance, said repossessions peaked in the second quarter of last year at about 1 500 houses a month going under the hammer but had dropped sharply since then.

Levitt anticipated it would only do 400 distressed sales this month. The prices achieved at auctions had also improved by about 30 percent year on year.

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