The process of buying your first home is incredibly exciting, however, if you want to avoid disappointment, you need to get your financial ducks in a row before you apply for a home loan. Below are a few financial questions you should ask yourself before applying for a home loan:

1. What is my credit score?

Remember, you’re aiming for a favourable and clean credit record, as this will increase your chances of getting your home loan approved. Use your annual free credit report from the credit bureaus to monitor your credit score and ensure there aren’t any inaccuracies. To maintain a good credit record, avoid missed or slow payments, opening too many credit accounts, and numerous credit enquiries. If you don’t have a good credit record, do some research on how to build a good credit history.

2. What is my annual income?

As a potential homebuyer, the maximum bond amount that you qualify for is based on your annual income. Be sure to include any bonuses or annual investment returns when making this calculation. Look at your annual tax return documentation if you’re not sure how to determine your actual yearly income.

3. How much debt do I have?

When you’re applying for a home loan, your disposable income is a key deciding factor. To increase your disposable income, pay off as much of your debt as possible. Lenders will require you to provide them with all the debt you currently have to work out a debt-to-income ratio. The ratio is used as a tool to determine your level of affordability. Having a lower debt-to-income ratio will be highly beneficial as it will increase the chance of gaining approval for a higher bond amount.

4. What is my financial worth?

Your net worth includes all your assets such as vehicles, investments and income-generating properties. Before applying, have all the documentation for your assets readily available. All these aspects add to your net worth and will have a bearing on the loan amount that the bank is willing to approve.

5. What kind of deposit can I put down?

Ideally, you’d want to have between 10-12% of your dream home’s value set aside as a deposit. Having a deposit works in your favour when applying for a home loan, as your affordability score will increase, and the bank will take this into account. Do your best to save up for the deposit you’ll need to increase your chance of bond approval.

6. What can I afford?

Your monthly home payment, which includes the bond, interest, taxes and insurance should not exceed around 30% of your income before taxes. Just because the bank has approved a certain amount, doesn’t mean you should find a house at the maximum bond about. It’s important to find a home that won’t wear out your pockets in the long run.

Final advice

Buying your first home is a long-term investment that you should be able to sustain over the loan period. When searching for your dream home, remember to purchase a property that you can comfortably afford. If you’re still uncertain about the process or your readiness, reach out to a real estate professional who’ll be able to help you with the home buying process and ease some of your anxieties.