- Your credit score is a big number above your head that tells a potential lender how much of a risk you are.
- Your credit score is determined by how well you manage your debt, how many accounts you have and how long you’ve had them for, among others. You can request your credit score annually from a credit bureau, or by using ooba’s Bond Indicator tool.
- A high credit score will smooth the way to a successful home loan application.
Very. High. Risk. These are just some of the four-letter words you don’t want to see when you consider your credit score before applying for a home loan. With that in mind, here are a few things you need to know about credit scores, so you can give yourself the best chance of getting your home loan approved.
What is a credit score?
As far as your bank is concerned, your credit score is a big number above your head that tells them how much of a risk you are. Your credit score indicates to your bank whether your past debt repayment behaviour will make you a good risk or not. Through various calculations based on your transactional records, the credit bureau will provide your bank with a three-digit number ranging between 0 and 999. Naturally, the higher the better, and a high credit score rating is one of the most valuable personal finance assets you can have.
How is a credit score calculated?
Credit bureaus will compile a record of your personal credit transactions and rate your debt repayment performance according to a credit score chart that indicates how well (or not) you manage your debt. The result could reflect in a credit score ranging from a minimum risk to a very high risk, which will inform the bank’s decision on whether or not to grant you a home loan, and what amount. If you’re successful, it might also affect the interest rate they offer and when it comes to big-money advances such as a home loan, the lower the interest rate the better!
Credit bureaus look at the following factors when calculating your credit record:
- Your debt repayment history
- Amounts owed
- Types of credit applied for and how often
- How long your accounts have been open
- How much of your available credit you’re using
- Whether there is any history of you not honouring a debt obligation that resulted in bankruptcy or a judgment against you
The credit bureaus won’t only be looking at your repayments history. They’ll be able to access your employment history and income as well and calculate your credit score according to a complex formula.
How to calculate your credit score
You can use ooba’s Bond Indicator to access your credit score. This is a 100% secure, online tool that is available free of charge and without any obligations. Based on the information you provide, the tool will give you an indication of your credit rating, and how much you can realistically afford. The Bond Indicator tool will issue you with an ooba Bond Indicator Certificate that will enable you to house hunt with confidence.
What credit score do you need to apply for a home loan?
Generally speaking, a score of 600+ will give you a fair chance of home loan approval. although this may vary according to which bank you use. Each bank uses both the credit bureau score and their own internal risk assessment criteria which looks at a number of factors specific to a particular home loan application, such as the loan size compared to the property value (zero deposit is considered higher risk).
If you are classified as very high risk, the chances are you won’t be successful in your home loan application as the banks will question your ability to pay them back.
A good to excellent credit score will have the opposite effect, possibly opening the way for you to negotiate preferential terms and interest rates.
Tips for improving your credit score
Any improvement in your credit score can only work in your favour. It’s relatively easy to achieve once you put your mind to it and exercise a little discipline in managing your finances.
10 tips on how to get a good credit score
- Make sure you don’t apply for more than one loan at a time because that will signal lenders that your financial status has deteriorated.
- Always pay your accounts in full and on time. Try and pay more than just the minimum instalment.
- Try to stay out of the red. So keep servicing your debt, only dipping into available credit when you really need to and reduce your credit limits where possible.
- As much as we don’t like to be in debt, having accounts is a must when it comes to applying for a home loan. Without them, the credit bureaus won’t be able to assess the risk associated with your application.
- It’s a good idea to get your credit card debt down first and keep the balances low because credit cards often carry the highest interest rates.
- Avoid owing more than a third of your gross income on debt.
- Close accounts when you’ve paid the balance owing. This will count in your favour as it will indicate that you are a lower risk.
- Revolving credit is a bad idea and also usually carries high interest rates.
- Remember that as much as you need to manage your own accounts, those of your spouse will also need to be in good shape if you’re applying for a home loan. The banks will want to know about their credit history too.
- If you’re unable to pay the amounts due on your accounts in full, make an arrangement with the creditors to pay lower instalments over an extended period of time.
Don’t lose hope if you do have an application rejected by your bank, as South Africa’s leading home loan comparison service, ooba home loans, can apply to multiple banks on your behalf, and have been successful in securing home loan financing for two in every three applications that are initially turned down by their bank.
ooba home loans also offer a range of home loan calculators to help make the home-buying process easier. Use ooba’s Bond Indicator to find out what you can realistically afford. Then, when you’re ready, you can apply for a home loan with ooba.