The most important part of home-buying is knowing what you can afford and what your credit score is before you put in an offer
WORDS: HELÈNE MEISSENHEIMER – IMAGES: SUPPLIED
The third quarter of 2020 has seen an unexpected surge in home-buying activity, especially from first-time homebuyers eager to benefit from the current low interest rate. Ooba Home Loans CEO Rhys Dyer says first-time buyers accounted for 54% of Ooba’s bond applications in the third quarter. According to Ooba’s statistics, 8.4% of home loan applications are declined due to poor credit scores and 7.7% due to affordability. Homebuyer education remains a top priority, says Dyer. “There’s concern that some first-time buyers don’t have all the facts about what they’re actually signing up for.”
What is a pre-qualification?
It is a clear indicator of what you can afford and what your credit rating is. “These two indicators are essential when purchasing a home. The bank will only approve you for an amount that you can afford to repay each month and a bad credit rating will not be accepted,” says Dyer. You may be concerned that if you apply to be prequalified for a home loan you are legally or financially liable. It’s not true. Unlike a promissory note – also known as a loan agreement – a pre-qualification doesn’t require any financial commitment on your part.
However, this doesn’t mean that you should set an unrealistic expectation of what your pre-qualification amount might be. Simply put, you wouldn’t walk into a store to purchase an item that you unequivocally couldn’t afford, so why would you shop outside of your price range when buying a home?
Do your homework
Buying a home is an emotional and lengthy process. In addition to behind-the-scenes research and viewings, one needs to consider the process of putting in an offer to purchase (OTP), which – if accepted – is legally binding. This paperwork takes time and requires input from the buyer, the seller and the agent.
“Without a pre-qualification, there’s a chance that the offer will be rejected and that all the work would have been done in vain. Also, keep in mind that if you’ve been rejected by the banks, you will need to wait three months before reapplying for a home loan,” says Dyer.
How does it work?
A pre-qualification can be obtained online and acts as an estimate of what you can afford. A pre-qualification is based on your monthly earnings, expenses, and any debts that you may have, and the certificate is valid for 90 days.
Dyer says while this step is not a guarantee you will be approved by the banks, a pre-qualification is an easy way to determine the price category you can shop around in. “Conversely, if a pre-qualification is denied it helps prospective homebuyers to be more realistic and to end the process before spending any money or time into an application.”
How a pre-qualification gives you an edge
Dyer says knowing your credit score definitely gives you an advantage as a homebuyer. Here are the reasons why:
- Shop with confidence
Knowing your credit score gives you the opportunity to address any issues before putting in an offer.
This gives you a pretty accurate picture of what you can actually afford.
- Stand out from the crowd Sellers are more likely to accept an offer from someone who has a pre-qualification. This acts as proof you can afford what you’re buying and will be approved by the banks. In a bidding war, a pre-qualification will help you to stand out.
- Avoid disappointment
A pre-qualification protects you from putting in an offer on a property you cannot afford as it will probably be turned down.
The advances in online technology has made it quick and easy to get your credit score and determine what you can afford within minutes. Bond originators such as Ooba, BetterBond and MortgageMe all provide you with the option for an online pre-qualification. Many banks also provide this service online on their websites. You simply register online, fill in a few details, and have your credit score checked.
“The benefit of this option is that applicants have a realistic idea of what they can afford in a matter of minutes and they are issued with a pre-qualification certificate – over 90% of home loan applicants with an Ooba pre-qualification certificate are approved,” says Dyer about the online qualification process with Ooba. Alternatively, if you prefer to speak to someone face to face, you can request it and a home loan expert will then help you with a more in-depth pre-qualification that will look at your credit score, income and expenses before a qualified buyers certificate is issued.