The truth about the bond application process
You are ready to buy the house of your dreams, you have done your affordability via an app on your cellphone, and you realise what you can qualify for. You decide to take the big step to sign an Offer to Purchase, which is accepted by the Seller, and now your application will be submitted to the bank… Now the bond application process starts.
The Procedure of bond application
First step is for the banks to determine whether your credit record is clean. If this has been determined, you will be scored by the bank. The scoring is determined by the way you conduct your accounts, whether debit orders have returned, as well as how fast and frequently institutions such as Telkom are paid. The bank will then give you a score level, which will not be covered in this article. Your score level will determine your interest rate, as well as whether you will qualify for prime or prime minus interest rate on your bond.
Once your credit check and scoring have been done, the banks will determine whether you can afford to make repayments on the bond you have applied for. This is step one of a bond application.
How do the banks determine affordability?
(the below example is given for an applicant who qualifies for a 100% loan)
The banks determine affordability by looking at your gross monthly income. The banks will grant you 30% of your gross income for housing purposes. If you and your spouse, as co-purchasers, buy a property together, the bank will look at the combined monthly income of the applicants.
An easy example will illustrate the above:
A and B earn a combined monthly income of R50,000.00.
30% of the combined monthly income can be utilized for housing purposes. In this example R15,000.00 can be spent on your bond repayments. You will therefore be able to qualify for a bond of between R1,200,000.00 – R1,500,000.00, depending on your interest rate.
The bank has now confirmed your affordability and will issue an approval in principle. The approval in principle can only become a final grant upon valuation of the property.
The bank has determined my affordability, now what?
The bank will send a valuer to value the property. If the property is valued at the amount in the quotation (approval in principle), the bank will issue a final grant. Once the final grant has been issued the transfer process will commence.
What if you are a self-employed applicant, or you have applied for a bond and the bank did not grant you a 100% loan?
In this instance it is important to note that a bank looks differently at a self-employed applicant. A self-employed applicant will seldom receive a loan for the full amount. The banks have a different set of criteria for their self-employed clients. However, all hope is not lost, as the bank will still approve a loan from between 80% – 85%, depending on which bank the application is submitted to and whether you are a client of the specific bank.
For the purposes of this article we will discuss the above scenario’s on an approved loan of 85% (whether as a self-employed or full time employed applicant having received a loan for 85% of the application amount).
Mr A buys a house for R1,000,000.00. The bank issues an approval in principle for 85% of the amount, being R850,000.00. A valuer has to value the property. The property is valued for R1,000,000.00. The loan amount in proportion to the value of the property is 85%, thus the loan to value amount will be R850,000.00. The bank will therefore issue a final grant to the amount of R850,000.00.
Take note that the higher the application amount, the greater the risk for the bank. The bank will therefore grant a lower percentage loan to value in order to mitigate their risk.
Once the final grant has been issued, the bank will instruct their panel Attorneys, also known as the bond Attorneys to proceed with the registration of the bond. For more information on the transfer process, please visit our homepage.