Home loan lending criteria: How banks approve loans

Article summary

• Looking to buy a home? Find out what the lending policy of banks is.
• Check what you might qualify for in terms of home loan finance and associated repayments by using ooba Home Loans’ range of home loan calculators.
• Make sure you request your credit score from a credit bureau as this will affect the success of your application.

If you’re in the market to buy a new home, chances are you’ll be looking for some level of financing from the banks.

Different banks have different lending criteria, and you need to know what those are to give yourself the best chance of acquiring a home loan at a favourable interest rate. Here’s what you need to know about a bank’s home loan criteria.

Standard home loan criteria for South African banks

Though banks may vary in what finance packages they are willing to offer, there are certain requirements that generally apply. For example:

• Homebuyer’s credit record (the higher the credit score, the better your chance of acquiring a home loan at good rates).
• The state of the property market (banks are more cautious about lending during periods of economic downturn).
• Affordability (the bank will ascertain whether you can afford to pay the home loan on the property you’re buying).
• Property assessment (the bank will assess the property to ensure that it is suitable security for lending purposes, and they will compare the market value to the purchase price).
• The size of your deposit (a higher upfront deposit naturally reduces the risk for the bank and stands you in good stead to get your home loan approved).

In all cases, the requirements of the banks may vary.

For example, one bank might be willing to approve a home loan application with a lower credit score than another bank. So you could potentially have a home loan application rejected at one bank but approved by another.

The importance of the credit score

The most important factor that banks take into account is the client’s credit record. This is a three-digit number that tells them how much of a risk you are.

• In calculating the score, a range of data sources are used, including the home loan application form, credit bureau and, where applicable, products the client already holds with the lender.
• The rules and regulations for banks’ individual credit policies are also included in their credit scorecard results.

How high should your credit score be?

You want your credit score to at least be 610. This is the cut-off point for having a credit score that stands you in good stead when applying for loans.

Below 610 would be considered high risk. You’ll want to look at ways to clear your credit record if your credit score falls in this region.

Credit scores in more detail:

• 781 to 850. Excellent.
• 661 to 780. Good.
• 610 to 660. Fair.
• 500 to 610. Poor.
• 300 to 499. Very poor.

Find out your credit score by getting prequalified with ooba Home Loans. You can get prequalified by contacting an expert at ooba Home Loans or by using our free, online prequalification tool, the Bond Indicator.

Home loan lending criteria during an economic downturn

Banks will lend more cautiously when the economy is showing negative growth.

• They are less likely, for instance, to offer homebuyers a 100% home loan due to the risk of negative property price growth.
• Banks may also require homebuyers who purchase property in an area that is more exposed to risk to put down a larger deposit.
• They will be more cautious about lending to homebuyers who derive their income from industries that are reporting significant job losses.

How do banks’ credit policies differ with regard to affordability and credit risk?

Banks are required to comply with National Credit Act regulations when assessing an application for finance.

Their credit policies, therefore, have the same fundamental principle of ensuring that the applicant has a good history of responsible debt repayment behaviour and sufficient net surplus income (after monthly household expenses and contractual debt payments) to afford the home loan instalment.

Find out what you can afford

As we said earlier, different banks have different lending criteria.

As such, the best way to secure a home loan with low-interest rates is to shop around for the best deal.

ooba Home Loans can apply to multiple banks on your behalf, allowing you to compare deals and choose the one with the best interest rates.

We also offer a range of tools that can make the homebuying process easier.  Start with our Bond Calculator, then use our Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.