The questions you need to ask yourself before applying for a home loan

Buying a home is one of the most significant financial decisions most people will make in their lifetime. For first-time buyers, the home loan application process can seem daunting. However, if you are prepared and understand what financial questions to ask yourself before approaching a lender, you will not only feel more confident, but you'll also increase your chances of securing a bond.

Before you apply for a home loan, take a step back and assess your financial health by answering the following essential questions:

1. What is my credit score?

Your credit score plays a crucial role in determining whether your home loan will be approved and what interest rate you'll qualify for. It reflects your financial history, specifically how responsibly you've managed credit and debt in the past.

Before applying for a loan, check your credit report from a reputable credit bureau. Look out for any errors, outdated information, or signs of identity theft, and dispute inaccuracies immediately.

If your score is lower than expected, consider paying off outstanding debts, avoiding new credit applications, and ensuring that all bills are paid on time. These steps can gradually improve your score over time and improve your chances of loan approval.

Tip: If you’ve had accounts handed over for collection, resolve them before applying for a loan. A history of defaults or missed payments can significantly reduce your creditworthiness.

2. What is my annual income?

Lenders want to see proof of a steady and reliable income to assess your ability to repay a home loan. When calculating your annual income, include not only your basic salary but also commissions, bonuses, and any regular investment returns you might receive.

Make sure you have all necessary documentation ready, including payslips, tax returns, and bank statements. These documents will help paint a complete picture of your financial standing and allow banks to determine the size of the loan you're eligible for.

If you're self-employed or a freelancer, prepare to provide at least six months’ worth of bank statements and a comprehensive record of income. In these cases, your ability to prove stable cash flow is key.

3. How much debt do I currently have?

Debt-to-income ratio is another critical factor lenders consider when reviewing your loan application. This ratio compares your total monthly debt payments to your gross monthly income. A high ratio indicates that you may be overextended and less able to handle additional debt, making you a riskier borrower.

Before applying for a home loan, assess your current debts, such as car loans, credit card balances, and personal loans. If possible, pay down these debts to improve your ratio. This will not only improve your chances of approval but may also qualify you for a larger loan amount or better interest rates.

Rule of thumb: Lenders typically prefer a debt-to-income ratio of less than 30–40%.

4. What is my financial worth?

Your net worth, what you own versus what you owe, also influences your bond application. Lenders want to know about your assets beyond income, including savings, investment portfolios, retirement accounts, and owned vehicles or properties.

Compile a list of all your assets and liabilities. This exercise will not only help you during the loan process but will also give you a clearer understanding of your overall financial health.

5. How much can I put down as a deposit?

While some financial institutions may offer 100% home loans, many require a deposit, typically between 10% and 30% of the property’s value. A larger deposit reduces the lender’s risk and can also lower your monthly bond repayments and potentially improve your interest rate.

In addition to the deposit, remember to budget for upfront costs such as:

• Transfer duties (if applicable)

• Bond registration fees

• Attorney fees

• Property valuation costs

• Moving expenses

Saving for a deposit and the associated costs is essential, and starting early can help reduce the financial strain during the home buying process.

6. What monthly bond payment can I realistically afford?

It’s important to have a clear understanding of what you can afford on a monthly basis—not just what the bank is willing to lend you. As a guideline, your total monthly housing costs (including the bond, insurance, rates, and taxes) should not exceed 30% of your gross income.

Use online bond calculators to get a sense of affordability, but also consider consulting with a financial advisor. Remember, overcommitting on a home loan can lead to financial stress down the line, so it's vital to be realistic and conservative in your estimates.

7. Do I have a financial safety net?

Unexpected life events, such as job loss, illness, or interest rate hikes, can put strain on your ability to repay your loan. Before applying, ask yourself whether you have a buffer in place. An emergency fund with three to six months' worth of expenses can give you peace of mind and help you stay on track with repayments during tough times.

Applying for a home loan is not just about convincing the bank that you're a safe investment, it's also about ensuring you’re making a sustainable and informed financial decision. By asking these seven critical financial questions ahead of time, you’ll be better prepared to navigate the home-buying journey with confidence and clarity.

Whether you're a first-time buyer or looking to upgrade, taking the time to assess your financial health now can save you stress and money in the long run.