When a home loan application gets rejected, many applicants feel despondent and think their journey to homeownership is automatically brought to an abrupt close
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Given the lowered interest rates and a large number of motivated sellers, home ownership has never been more attainable. 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 obtained home loan finance in the first quarter of 2021, 15% of applicants are rejected due to a lack of affordability or a poor credit score. Of these rejected homeowner hopefuls, a staggering 42% were rejected by their own bank.
The personal bank myth
When applying for a home loan, you’d assume that your first stop would be applying to your own bank directly. Not so, explains Rhys Dyer, CEO, ooba Home Loans. “You’ve probably got a great relationship with them and they’re normally your first port of call. However, the bank’s lending criteria are regulated by the National Credit Act and therefore there’s no guarantee that they’ll be able to approve your home loan. Based on this, we recommend spreading your risk by making use of a home loan comparison service to increase your chances of being approved – at the best possible interest rate.”
A home loan comparison service will apply to multiple banks on your behalf. “From our own experience, we’ve successfully secured home loan financing for about two out of every four applications that were initially turned down by their own bank. This is because each bank makes use of a different scorecard (or lending criteria) when evaluating an application,” Dyer adds.
When banks assess whether to approve a home loan, their first step is to check your credit score. “A poor credit score is the most common reason for rejection. Luckily, there are steps you can take to improve your standing before applying again.” If your credit score is rated poor (below 600), Dyer suggests you obtain a copy of your credit report from the credit bureau. “If you identify errors on your credit report, the credit bureau should be notified of these and you should then take the necessary action to rectify the information displayed on the report. This will entail engaging with the credit provider who has provided the credit bureau with incorrect data.” If the information is correct and your poor credit score is the result of an impaired credit record due to bad debts or having no credit history whatsoever, further action will need to be taken.
Improve your credit score
If your poor credit score is due to a lack of credit history, meaning that you have no record of being able to take out and pay back a loan, you should begin by opening small retail accounts or entering into a cellphone contract. These debts should be paid back on time and in full (if not a bit extra) each month. If you have a low credit score due to an impaired credit record, you will need to try and settle your debt as quickly as possible. Dyer shares the following tips to help bolster your credit score:
- Pay your bills on time.
- Settle and close accounts.
- Pay more than the minimum instalment on existing debts.
- Avoid applying for additional credit over this period.
“If you’re applying for a home loan alongside a partner or are married in community of property, then your partner will need to follow the same steps. Once you have started the credit rehabilitation process, you should continue to check your credit score every three to six months and make the necessary adjustments,” says Dyer. He also advises prospective homebuyers to work with a trusted home loan comparison service. “Prior to starting the home loan journey, find a trustworthy service provider, know your credit score, and obtain a pre-qualification certificate. This will give you a good indication of what you can afford and whether you’re potentially eligible for a loan.”