Mind your step: How credit footprints trip up home loan applicants

In our experience the first pitfall that ends many applications before they begin is the credit check. We do this check via a registered credit organization and it is one of the tools we use to accurately determine the likelihood of a successful application before we submit.

The check delves into a client’s credit history (or credit footprint) and generates a score for the client based on what is uncovered. This scoring is the exact same process that the bank will use when they perform their own credit check after a home loan application has been submitted.

A history of non-payments, late payments or defaults will result in a negative score and the client will be labelled ‘high-risk’. A high-risk client is unlikely to receive a loan from any of the major financial institutions in South Africa until they can present a clean history and be reclassified as ‘low-risk’ (for late payments this will take TWO years to clear, while for the more serious default or judgement it will take FIVE years).

You probably know all of this already but what may shock you is the fact that South Africans living and working abroad for more than two years and young professionals often receive scores similar to payment defaulters. This is because their complete lack of a credit history in South Africa makes them, to the banks at least, an unknown quantity and thus a high risk.

This is particularly true of young professionals fresh out of university. Our database is full of newly qualified doctors and chartered accountants who earn sufficient income to qualify for home loans of R1 million or more that are declined because they have never had credit cards, loans or accounts with a retailer.

This is frustrating to us (and the client) because of the clear, high income potential of these types of clients. What is even more frustrating is the fact that, as first time buyers, they qualify for a home loan of 100% of the purchase price and thus do not have to wait months, or years, to save up a deposit but are prevented from applying because their lack of credit history scores them as ‘high risk’.

So, you’re a young professional, you’ve settled into your first job and now you’re thinking about investing in a home. Or maybe you’ve settled overseas and want to invest in property back in SA. What can you do to avoid delays that could cause you to miss the opportunity to own that dream home or lucrative investment? Follow our advice! Start now and:

1)      Open a retail account (e.g. Woolworths, Truworths) or apply for a credit card.

 2)     Use the account for small transactions. ALWAYS PAY YOUR ACCOUNTS!

 3)      Transact on these accounts for at least six months before considering the purchase of a property or applying for a home loan.

 4)      AGAIN DO NOT FORGET TO PAY YOUR ACCOUNTS!  

With self-discipline and adequate forethought an impeccable credit history is relatively easy to maintain (even from abroad) and is very often the difference between seeing your money spent on rent (i.e. going into someone else’s pocket) or invested in your future.

Editor’s Note: Please also read our piece on the upcoming Credit Amnesty for future complications for those without credit histories.

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