Can you buy a home without a credit history?

With interest rates expected to start increasing later this year, the ideal situation is for consumers to live as debt-free as possible. This means no credit cards, vehicle finance or any other type of debt for any reason.

“While consumers who have high debt levels should try to pay down their debt as much as possible and it is good advice to live debt-free, having no debt or credit history could be problematic for consumers who are looking to purchase a property,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.

He notes that as little as 5% of first-time buyers are able to purchase a home without requiring finance from a bank or lending institution. This is a very small percentage of the total number of first-time buyers in today’s real estate market. Very few buyers are able purchase a property outright and will need a loan of some kind. “Essentially this means that the majority of first-time buyers will need to apply for a bond in order to purchase a property. While having too much debt will impact their ability to qualify for finance, having no debt at all could negatively affect their chances of being approved for credit,” says Goslett. “Some buyers may have no credit instead of bad credit which could be a problem. Lenders want to see that the buyer is a good payer and will honour the bond agreement. Having no credit history makes it difficult for lenders to assess a buyer and the potential risk of approving the finance.”

Goslett says that when building a credit history, moderation is the key. It is important that consumers don’t overuse or underuse their credit. “Generally, being approved for a home loan in order to purchase a property will require a credit history.  Prudent use of credit is the only way to ensure that a good credit history is built, which means that consumers should avoid buying items that are not within their financial means,” advises Goslett.

For homeowners with little or no credit history there are two options, the first of which is creating an alternative credit history from other financial records such as rental payments, insurance premiums or utility bills. “This option could take several months to complete and will still not result in the buyer having a good credit history. This means that while the bond application might be approved, the buyer will more than likely pay a higher interest rate than a buyer with an established traditional credit history,” says Goslett.

He notes that the other option is for the buyer to get a credit card and spend a manageable amount on it. The buyer must pay at least the minimum payment requirement for a period of around six months. This will generate a real credit history that can be used when applying for bond approval.

“Other than the credit used to build a credit history, buyers should try to remain debt free. They should also have at least six months of expenses saved up as a contingency fund, along with a deposit of at least 10% of the asking price of the property they are looking to purchase. This will put them in the best financial position when purchasing their home,” Goslett concludes.

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