How you can get a home loan when you don’t have a long credit history

In a country almost crippled by debt, the financially prudent ask: “How do I get a home loan without getting into debt?”

According to the SA Reserve Bank, South African household debt constitutes 71% of gross income. For this reason, I don’t blame people who would want to tread carefully when taking on debt such as a credit card or a personal loan.

Whether you are looking to purchase property as a place to call home or you want to rent it out, banks want to see past behaviour on handling debt. This is where a lot of people are caught in a catch-22 – consumers are encouraged to stay out of debt, but banks require you to have a credit history to extend credit to you.

While you don’t have to start maxing out your credit card and spending on items you don’t need, you do need to show how you have dealt with credit in the past. This is to protect the lender from potential defaults.

Think about it this way: If everyone you personally knew and those you didn’t know came to you asking for a loan, how would you gauge that they could pay you back? Would you take their word for it and hope for the best? Probably not, you would want evidence that they would be able to repay you.

That is why a credit report is so important. It informs the lender of whether they should extend you a credit facility and how much interest you should pay. Lenders want to see that you are a good payer and will honour the bond agreement.

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The higher your credit score, the more likely that the lender will grant you access to credit at a favourable interest rate. The lower your credit score, the less likely that the bank will extend you a loan, and if does grant you the loan, you will be charged a higher interest rate.

So how does one go about getting approved for a home loan without an extensive credit history? Unfortunately, it does require effort.

Oftentimes you are not required to get into debt. You can apply for a credit card, take out a store card or take on a cellphone contract to build your credit score.

With a credit card, for example, you could set the limit to a minimum that you can manage, use the credit facility and pay it back before the interest is due.

The mistake that most people make is that they rack up debt irresponsibly, spending and taking on unnecessary debt disguised as building a credit score. What starts out as wanting to build a personal financial record soon turns into reckless use of credit.

Banks do not only look at your credit score to determine whether you qualify for a home loan or not. They also look at your pay slip, your bank statement and expenses to see whether or not you will be able to afford the home loan.

Read: How to own your home in 15 years

There are other options too if you have little or no credit history, the first of which is creating an alternative credit history from financial records such as insurance premiums, utility bills or rental payments. TPN, a registered credit bureau which services the rental market in South Africa, is one way in which a landlord can track your payment history, which you can potentially use in your home loan application. But this takes time and you would have to negotiate with your bank.

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In addition to the above, for the bank to favourably consider your application you need to have a deposit, which is normally about 10% of the purchase value of the property.

For graduates who have just started working and want to purchase their first property, it is not advisable to purchase in the first month you start a job. Rather wait for at least 12 months and build up your credit score, otherwise banks will charge you a higher interest rate to compensate for the risk.

Although it is not impossible to obtain a home loan without an extensive credit history, it does require effort for sure. You have to ask yourself: “Am I willing to potentially pay a higher interest rate or to be disciplined and manage a small credit facility to qualify for a favourable approval?”