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Wednesday 12 April 2017

Improve Your Chances Of Getting A Home Loan

Homeloan please! 
I have been in the very fortunate position to have made two successful home loan applications in my recent past. (I think I have to plant around 5 trees to make up for the amount of paper consumed as a direct result of this). So I guess I am what you may call  "somewhat experienced" - an orange belt in homeloan application karate?

The two applications have taught me a lot, and so I thought I would share some war stories and lessons learnt while getting beat up by the Banks (they are all black belt you know).

Obviously there is the usual criteria you need to meet before a bank will grant you a homeloan. These are put in place to protect idiots from themselves, but also to protect the bank from any idiots that may work for them - remember mankind keeps making things idiot proof, the universe keeps making better idiots - so far the universe is winning.

This blog post assumes that you have done a proper Buy versus Rent analysis and, after considering all the factors, you have determined that buying is the best decision for you. This blog post also assumes that you have met the "minimum" requirements of loan repayment versus disposable income etc. (To check your eligibility, there are many tools and calculators online you can use, such as this one). Consider this post the "higher grade" class :)

The problem is, meeting these minimum requirements is sometimes not enough, and the banks usually have some more secret hoops they want you to jump through - except they don't tell you what the hoops look like or where to find them. Anyways here are some tips to improve your chances for success.

Ok it's story time, get yourself a cup of tea...

Window Dressing Your Bank Account For A Bond Application

Once upon a time Stealthy had a bank account with ABSA. His dad had opened it for him when he was still in high school. He remembered it well....

No screw it, writing in third person is a terrible idea!

I remember it well. It was given to me as part of my Christmas present, and my dad had deposited R50 into the account (that was worth something back then). I immediately memorized the account number in preparation for all the people I would need to give it to (no-one is a person too!)

I remember walking once a day for the next week or so (December holidays, lots of time) and drawing a mini statement, all adult-like, to see the R50 balance. On the 1st of January I got up extra early and went to check the balance to make sure that my 13 odd cents of interest had been paid - and it had! Wow, my money was working for me!

Anyways, fast forward around 15 years and the ABSA account had been upgraded first to a student account and then finally to a very adult, monthly fee sucking, Cheque Account.

In addition to this, and you are never ever allowed to repeat this (and it is also the last time you will hear it from me) I had some Unit Trusts with ABSA as well... *cold shiver*

So what was the purpose of me having those "products I will not speak of" with ABSA?

Well, my then girlfriend, now wife, and I were getting pretty serious by this point, and so we wanted to buy a house together (well technically an apartment). So I had been diligently making a debit order payment to a few ABSA "products I will not speak of" every month in order to save up for the deposit and transfer costs we would need to pay.

My wife and I scouted around and made an offer for an apartment we really liked. The offer was accepted, and it was now Bond Application time - that fun time where you get to grovel and try prove you are worthy to the banks and hope they show you some mercy (and some money).

Now I had done a number of rough calculations, and based on our incomes and the slightly more than 10% deposit we had, I was fairly confident we would get a bond.

The estate agent gave us a Bond Originators details, but in parallel I thought I would also make an application at ABSA directly since they were my primary bank. So off goes the 2 trees worth of forms, which included the usuals, and 3 months bank statements.

After being with ABSA for around 15 years and having multiple ABSA products, I guess I was what you would call "a loyal ABSA customer to which they could cross sell their other products to". So naturally they would jump at the opportunity to add a home loan to my basket of ABSA products.

Well ABSA came back a few days later with a response...DENIED!

Tea- great for story time!
And on that cliffhanger I will build the suspense by saying if this is getting a little long winded, I apologise, time for another cup of tea? (Don't worry if your bladder is getting full, there will be a toilet break a little later on :))

Naturally I ask for an explanation - how could they be so mean to little old loyal me? I am told, that after checking the three months bank statements, there is not enough free cash (I think their term is discretionary income) every month, and there is too much money leaving the account.

So I say well obviously there is money leaving the account - all of it is voluntary (i.e. discretionary) debit orders going into ABSA "products I will not speak of" - how else was I supposed to save for our deposit? Also since they are all your products, you can check your system and see they have since been stopped as I know there is a home loan commitment coming, and so that money is now clearly available?

I was again told, no, sorry for you, you suck - ok thanks bye.

(I was a little pissed off and I actually even recall phoning in to 702 a few weeks later when they were having a Bond Application discussion to vent a little. And since I am ranting about it again, I guess I am still harbouring a little.... maybe I should go smash some ABSA ATM's glass bottles or something....)

But moving swiftly along, in stepped Nedbank with an offer, as well as FNB, as a result of the Bond Originators good work.

FNB were particularly kind because they factored in my Engineering qualification and gave us a rate of 0.5% below prime. It's funny how these banks were able to recognise voluntary debit orders, but the very bank that the debit orders were going to could not.....anyways...

We signed with FNB.

Now there is a lesson in all of this somewhere....but firstly let me have the last laugh at ABSA. You see their little act of meanness resulted in me:
  1. Cancelling all my "products I will not speak of" with them
  2. Cancelling my cheque account with them
  3. Signing a cheque account with FNB (to get the access bond facility)
  4. Signing a home loan with FNB
  5. Signing a second home loan with FNB when we bought Stealthville
And points 1-5 above will result in ABSA losing out on probably close to R1mil over my lifetime. Although in the greater scheme of things, that's probably small change to them....

Anyways, the main lesson here (and something that we did when we made our second home loan application) is this:
Improve your homeloan application chances of success by "window dressing" your bank account
So here is what we did for the 3 months leading up to our bond application last year:
  1. Cancel all voluntary debit orders (this unfortunately included our TFSA contributions for those 3 months)
  2. Try minimise all spending to reduce what the banks view as "leaving your account"
  3. Allow your balance to steadily grow over the 3 months (which will happen after you do 1 and 2 above, and can also be used to increase your deposit amount and/or cover all the fees that come with buying a property)
The bank sees your bulging account balance on your three months bank statements, and thinks "well, they have a lot of money left over each month, they awesome, let's direct all that extra money to us".

Show the banks you are worthy of that loan.

And so ends our story, Little Red Riding Hood ABSA bank never lived happily ever after.

This tactic of window dressing our Bank accounts leading up to our second bond application resulted in two banks approving us for the Bond. The rates were the same, so we bargained with FNB and they dropped theirs by 0.05% (every bit helps...)

And after two cups of tea and this very long story, you probably need to pee....go ahead I will wait.....

Great, you back - hope you flushed and washed your hands? :-P

The Usuals

Then of course there are the usual tips for improving your chances of homeloan success. I am sure you have come across these before, but it is probably worth repeating here.

We managed to scrape together a more than 10% deposit in both applications, and I do believe that this helped. I hear it is possible to get a 100% bond, but I think there is a significant risk that you may not get approved, so I wouldn't recommend it. Also it must be asked - if you cannot commit to saving a 10% deposit, are you really ready for the commitment (both financial and otherwise) of owning a house?

It is also a good idea to know your monthly expenses before you apply. The bank is going to ask you for this, and it is not a good idea to fudge the numbers because they will check your bank statements (one of the trees you need to send with your application) and catch you with your pants down (rumour has it the size of your bond may be directly proportional.... :)).

What I found most useful with this part of the application is it makes you realize if you honestly can afford the place or not - something only you yourself will truly know. Don't forget to factor in the new costs that will come along with owning a house - levies, rates and taxes, water, electricity, maintenance etc. Get a good idea of what these will be before putting in an offer.

Don't Overpay
Seems obvious, but sometimes emotion can get the better of you, or sometimes it is just a bad deal. Either way if the bank thinks you are overpaying they will decline your application. To be honest I haven't heard of this happening as most buyers should have a good idea of what the price should be, but just something to keep in mind.

Even More Recommendations

Something that you may want to do is make use of Bond originators. Again this is something that you hear quite often, but in my experience it really does help.

At the least it will save you a tonne of paperwork - usually each bank has their own forms asking you for pretty much the same information, but you need to fill it out separately for each bank. At least with the Bond originators you get one document pack to fill out and off it goes to all the banks.

Having said that I also suggest applying at your primary bank in parallel. I did that with both applications. In the first application it was a waste of time, but in the second one it was well worth it - we scored ourselves a below prime interest rate. Having said that we had a bit of bargaining power because another bank also offered us a loan - which brings me to my next point...

If you get two banks offering you a loan, don't be scared to try negotiate a better deal. Remember that even a tiny interest rate saving over the 240 months can be quite significant.

Something else to consider is buying for less than R900k. As at the time of writing, if you buy for less than that, then you do not pay any transfer duty. Having to pay transfer duty can detract from the size of the deposit you can put down, and thereby decrease your chances of getting a homeloan - so you will be better off avoiding this cost.

Anyways that's my R2 million 2c on Home Loan applications - I am sure there are lots of other tips, tricks and tales of woe. If you got any, then feel free to rant away in the comment section below.

Till next time, Stay Stealthy!
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