First time home buyer woes

Purchasing your first home is a dream for many people. But how easy is it for a person to buy their first home? Moneybags journalist Jessica Anne Wood investigates what you need when applying for your first home loan, and all the challenges that you may face as a first time home buyer.

While it’s an exciting choice to make it’s by no means one that you can just jump straight into. Steven Barker, head of home loans at Standard Bank, said: “Buying a home is a major step towards creating a haven for your family and making a long-term investment in your financial future. As such, it is a purchase that should be carefully considered and planned for.”

Home loan affordability

According to Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, low interest rates have made it easier for first time home buyers to qualify for a home loan over the past few years.

One of the most important things to keep in mind when applying for a home loan is that you need a clean credit history, as well as an income that will support the bond amount that you are applying for.

Geffen explains: “It’s just as easy for a qualified first-time buyer to purchase property as it is for anyone else who has bought before. They need a clean credit history and a steady income that the banks believe will allow them to service the bond going forward.”

Clint Bower, from home loan negotiators CapCubed Finance, says: “In theory as long as the applicant has a good credit history and is able to prove they can afford the mortgage payments for the home loan applied for, the bank will grant the bond. While this is true, presenting the information to the bank in the correct manner in order to maximise the likelihood of a bond grant is key. Here is where the expertise of an experienced mortgage originator or bond consultant should be considered to guide the applicant through the bond application process.”

Desiree Peers, an independent bond originator, explains that “bond originators offer a free service to clients and shop around for the best interest rate the market can possibly offer in today’s economic climate.”

How to get a low interest rate

According to Peers, banks will determine an interest rate for your home loan according to your risk profile. This will be determined by your credit score. Some of the factors that influence this include, the size of your deposit, your credit score and the value of the property and location.

“One hundred percent bonds will always attract higher interest rates.  If a client can afford a deposit, it is recommended.  By offering a deposit you are reducing the risk to the banks and in return the banks will offer a better interest rate,” adds Peers.

According to Barker, having a joint bond with your spouse can make the approvals process and the affordability of the bond a bit easier.

“Sometimes a property requires the income of two salaries, whether it is to get a home you need, the house you want or buying a house as an investment. A joint bond may then be the only viable way of getting into the market. The advantage of a joint bond is that partners can agree to both contribute to the monthly bond payment, making the acceptance process that much easier, and the payments easier to afford,” explains Barker.

What you need to apply

The documentation needed to apply for a home loan includes, a certified copy of your ID book/card, your latest payslips (three months for fixed income and six months for variable income), latest bank statements (three months for fixed income and six months for variable income), proof of residence not older than two months, signed permission to allow a bond aggregator or a bank permission to conduct a complete credit check, and a copy of current signed rental agreements (if applicable), as well as your IRP5/IT34 as at the end of the last tax year for variable income applicants.

Geffen adds: “The documentation gets substantially more complex if the applicant is self-employed, so I’d suggest discussing the list with the estate agent when you begin looking for a property, rather than at the stage of putting in an offer.”

Bower adds that the documentation needed can also vary according to the bank you are applying through.

Get your credit record in order

When applying for a home loan it is vital that you have an established and clean credit record.

Geffen explains: “An established, and clean, credit record is essential to getting a bond for South African citizens. It’s one of the biggest criteria by which a bank can judge whether or not an applicant will be a good credit risk, because homes are generally the biggest investment most people will make and involve much larger sums of money being borrowed than just about anything else.”

Bower says: “The banks rely heavily on credit scoring when assessing a client’s credit worthiness. The applicant’s credit score is used to determine how a client conducts his existing line of credit. The better your conduct of existing credit lines, the better your credit score. It is vitally important then that an applicant has an established credit record.

“In the instance where the applicant has no credit record at all the credit score for that applicant will be low or non-existent. This will often result in a home loan application being declined as the bank has no way to determine the client’s likelihood to service the home loan instalment on a monthly basis. It is vitally important that any credit line is serviced correctly and that the required instalments are paid on time in order to avoid adverse scoring.”

Questions you should ask

Mark Upton, principal and CEO of Upton Properties, points out that there are a number of questions that the home buyer should ask the seller.

  • Are there any defects in the property?
  • Are there any leaks?
  • Does the property have up to date plans, registered with City Council?

There are also some questions that you should ask the estate agent:

  • How long has the property been on the market?
  • Have any offers been submitted yet?
  • When is the proposed occupation date?
  • What fixtures are included?

Upton says: “The agent should have a full disclosure form signed by the seller attached to the agreement of sale. If the buyer suspects damp issues or is concerned about possible problems they are within their rights to ask for an independent property inspector to inspect the property at their cost to inform them of any issues. It is best to buy the least expensive home in the most expensive area from an investment point of view – remember location, location, location!”

Costs and transfer

You need to find out what you are paying for besides the home loan.

This includes the cost of the attorney’s fees, any inspections that may need to be carried out, for example gas and electrical, transfer fees and so on.

Geffen highlights that many people are under the misconception that transfer fees are due on the actual date of transfer. This is actually incorrect.

“Transfer fees are usually due about a month before that, because the receipt has to be lodged with the papers at the Deeds Office in order for the transfer to take place. There is a sliding scale of fees and it’s best to ask your estate agent about this, but be aware that you’ll need those funds about a month ahead of time and it can run into hundreds of thousands of Rands, so be prepared for this,” said Geffen.

Transfer date and date of occupation do not always coincide, and if you take occupation of the property before transfer, you will be liable to pay occupational rent to the person you are purchasing the property from.

“From a property point of view, make sure you’re clear about what’s included and excluded in the sale. There are often ambiguous items such as under-counter bar fridges that appear to be built in. These need to be specified either way. Sometimes sellers also have an emotional attachment to a particular item like granny’s chandelier that they want to take with them. If so, it needs to be specified upfront and agreed to prior to the finalisation of the sale,” emphasises Geffen.

Tips for first time buyers

If you are looking for a house in a popular area, Geffen suggests that you list with agents in the area to ensure that you are the first to know when a new property comes on the market. “When there is low stock and high demand agents frequently sell properties to people on their buyers’ lists before they’re ever publicly marketed.”

The bigger your deposit, the better your chances of having your home loan approved. “Lenders are always willing to reward low-risk borrowers, so the more of your own money you can put into the purchase upfront, the better off you will be,” says Geffen.

“If you are a first time home buyer, consider doing proper research before approaching a bank for a loan to purchase your dream home. Consideration should not only be given to finances, but to the property itself. This means you as a buyer should find out more about the area in which the house is situated, the average value of properties in the suburb, and take time to have the house examined for possible defects such as poor plumbing, potential electrical problems and structural concerns,” suggests Barker.

Don’t under estimate the costs of running the house. It is easy to think about the bond repayments, rates and taxes, and other costs that come with purchasing a house. But, Geffen highlights that people sometimes don’t factor in some of the additional costs that might be involved.

Barker adds: “You need to check what insuring the property will cost on a monthly basis to ensure that you can afford paying the monthly bond as well as insurance. [You should also] consider credit life cover to protect the outstanding loan balance in the event of disability, dread disease, retrenchment or death.”

Future-proofing the value of your home

Something that all the experts agree on is that buying the smallest property in the best area is a good investment.

David Rebe, CEO of Sandak-Lewin Property Trust, explains: “Buying the smallest home in a popular block in a good area as opposed to the biggest on a less popular or favoured street will reap big rewards when you choose to sell the property. This is due to the fact that often the smallest property in the neighbourhood sells for a better price than in a less popular area, as its value is brought up by the price of the neighbouring properties. Buying in areas with a history of strong tenant demand is an indication that the area is in demand and it shouldn’t be a struggle to rent it out or sell when the time comes.”

One thing to always keep in mind, according to Geffen, is the resale value of the property. “If you’re buying an older property, consider saving to modernise the kitchen and bathrooms, which will generally increase the resale value of a property. The golden rule is always location, location, location. Try to buy in the best area you can afford, even if it is the worst house.”