When you buy a house in South Africa, you can’t escape the real impact of your credit score when you apply for a home loan. Regardless of whether you are a first-time homebuyer, an existing homeowner looking to upgrade, or an investor in luxury properties, your credit score is one of the primary factors influencing the decision to grant you a home loan. In this article, we will look at the role of credit scores and their influence on home loan applications.

What is a Credit Score?

Your credit score is a number that tells potential creditors – lenders – how good you are at paying back money that you have borrowed. To calculate it, credit bureaus look at things like whether you always pay your bills on time, how much money you owe, how long you’ve had credit, if you’ve recently applied for new credit, as well as the types of credit you have. Types of credit that the credit bureaus track include: clothing accounts, home and car loans, as well as credit cards and cell phone contracts.  A good credit score means you’re less risky for banks, making it easier to finance your home and get a favourable interest rate.

The Importance of a Credit Score in Home Loan Applications

Your credit score plays a critical role in the home loan application process. As already suggested, banks and financial institutions use it to assess the risk of lending you money. A higher credit score indicates to the bank that you manage your debt responsibly and are therefore more likely to repay the loan on time. On the other hand, the lower your credit score, the more likely it is that the bank sees you as a risky borrower and will be less likely to grant a home loan or, if they do, they will be more likely to charge higher interest rates.

What Credit Score Do You Need to Buy a House?

In South Africa, the minimum credit score to qualify for a home loan is typically around 600. However, this is not a hard and fast rule because different banks may have different criteria. In addition, credit bureaus use different criteria and data sources for calculating credit scores. Below is a list of credit score ranges and how banks tend to view them:

• 600 - 650: You may qualify for a home loan but with higher interest rates.

• 650 - 700: Most banks will consider you favourably and with better interest rates.

• 700 and above: You will have the best chance of securing a home loan with favourable terms and interest rates

What Factors Do Credit Bureaus Consider When Calculating Your Credit Score?

We have already mentioned that having a range of creditors and types of credit, how long you’ve had those accounts, and maintaining a good payment history are among the most significant factors influencing your credit score. The payment history, alone, along with the age of your oldest account, your newest account, and the average age of all your accounts make up about 35% of your score. This includes your record of on-time payments, late payments, and whether you have ever defaulted on any debts. 

Finally, the bank and/or credit bureau will look at how many new accounts you have opened and/or tried to open. When you do this, the bureau records the creditor’s enquiry: too many new accounts or queries can result in lowering your score.

The table below gives more information about credit score ranges and what they mean for you.

It's important to note that these ranges are general guidelines, and individual banks’ policies may vary. Generally, the lowest credit score to qualify for a home loan is 613, and as you see from the table above, with a credit score of 656 your chances are better and with a credit score of 780, you’d be in an even stronger position to negotiate a loan with good lending terms and a lower interest rate.

First-Time Homebuyers

For first-time homebuyers, the prospect of securing a home loan can be daunting. If you are in this category, you should aim for a credit score of at least 650 which will improve your chances of getting a bond with a reasonable interest rate. Remember, too, that if you can pay a substantial deposit towards your home loan, this will not only reduce the amount you need to borrow but will also improve your loan-to-value ratio, which also makes you a more attractive prospect to the banks.

Existing Homeowners

If you are an existing homeowner wanting to upgrade or refinance your current home, you also need to make sure that you have a good credit score. Again, a score of 650 or higher, in combination with a good payment history on your existing home loan, will work to your advantage.

Investing in a Luxury Property?

If you’re contemplating investing in luxury properties, you need a strong financial profile and a credit score of 700 or more, supported by proof of substantial income and assets. This high score not only increases the likelihood of securing property finance but positions you to negotiate the best possible interest rate.

What Can You Do to Improve Your Credit Score?

If your credit score is not where it needs to be, don't despair. With hard work and discipline, you can improve it. You will already have noted that there are some obvious things you can do, but which bear repeating below. Firstly, pay your bills on time: consistently paying your bills by the due date is one of the most significant factors in improving your credit score. Take steps to reduce any outstanding debt, especially on credit cards. A lower credit utilisation ratio positively impacts your score, as does limiting yourself when it comes to taking out new loans or opening new accounts. Remember that this will reflect on your credit record – especially if your application is rejected.  

Word to the wise: 

Regularly check your credit report – most credit bureaus will let you have one free credit report each year. Check for inaccuracies or errors that could negatively impact your credit score and report discrepancies so that the credit bureau can correct them.

Other Factors Influencing Home Loan Approvals

In addition to a good credit rating, banks also consider other things when they evaluate home loan applications. We have already mentioned the value of having a substantial deposit which not only tells them that you have some financial savvy, but reduces the amount you need to borrow. Other considerations include your income and employment history: they need to know that your income is regular and usually this is demonstrated by your employment record. This is why they ask for bank statements and pay slips. Finally, banks will also look at your debt-to-income ratio which shows how much of your income goes towards debt repayments: the lower the ratio, the better it is for you – and the bank. 

Understanding credit scores, and how they work is essential for anyone applying for a home loan to buy a house regardless of whether you're a first-time or existing homeowner. The secret sauce is simple: maintaining and/or improving on your good score, coupled with a strong financial profile significantly enhances your chances of securing a home loan with favourable terms. 

A last word:

Once you are sure you have achieved an optimal credit score, use this bond calculator to get an idea of the amount you could qualify for. It will also give you a good idea of the other costs involved in a property transaction, including bond and transfer costs. With all this information in hand, you’re then ready to take the next step: apply for pre-approval on a bond. 

Partner with your local RE/MAX agent. Not only can we help you find the perfect home, but we will also put you in touch with bond originators to help you find the best possible home loan. 

*Disclaimer: This article is not intended to be official financial advice. We recommend that you consult a registered financial advisor. RE/MAX of Southern Africa cannot be held liable for any action taken by readers of this article.

Have more unanswered questions? Here are some related questions – and answers – that might help…

Can I buy a house in South Africa if my spouse has bad credit?

If you're married in a community of property, both your and your spouse's credit scores will be considered when you apply for a home loan. So, if your spouse has a bad credit score, it could have an impact on the outcome of your application. On the other hand, if you're married out of a community of property, only your credit score will be taken into account - unless you are applying for a bond together.

Does a home loan increase my credit score?

Yes, taking out a home loan can – potentially – increase your credit score – over time. However, that will only happen if you manage that debt responsibly by paying your monthly installment in full and on time, every month. 

Which credit bureau do home loan providers use?

In South Africa, institutions vetting home loan applications typically use credit reports from one of the major credit bureaus. The credit bureaus that are mostly used are TransUnion, Experian, or XDS. These bureaus collect and consolidate credit information from various sources to create comprehensive credit profiles, which lenders use to assess your creditworthiness.