How to apply for an investment property loan
Financing property for investment purposes can be a completely different ball game from applying for a home loan, and would-be investors need to understand what banks require to finance their investment dreams.
In a presentation at the Property Buyers Show in Durban, Dinesh Chetty and Farahana Mahomed, from home loan specialists Durban Property Finance, outlined the criteria for successful application of investment property financing.
The amount a client can apply for is also based on a calculation which the pair explained as: The buyer’s income multiplied by 0.3, divided by the interest rate, and then multiplied by 1000. For example, a buyer with an income of R20000, based on an interest rate of 11.5% would be able to apply for a loan of R542990.
Before this though, buyers need to know the banks’ requirements for application. An acceptable income, according to the banks includes:
- Basic salary.
- Overtime – as long as it reflects on every pay slip submitted.
- Allowances – travel, car, NP cash, shift allowance, scarce skills, and housing subsidy.
- Maintenance – copy of divorce decree and three months of statements reflecting maintenance deposits.
- Unacceptable income includes:
- Travel/petrol reimbursement.
- Applicants who are employed by a company must produce the following documents to apply for an investment property loan:
- Fixed monthly income – latest pay slip (not older than 60 days).
- Fixed weekly wages – latest four weeks’ consecutive pay slips.
- Fixed fortnightly pay – latest two consecutive pay slips.
- Variable income – latest six months’ consecutive pay slips.
- The three most recent months’ bank statements, all of which need to correspond with the payslips provided, and at least one must be an original with a bank stamp or logo.
- Self-employed individuals, however, need to produce a different set of documents, including:
- Latest two years’ business financials.
- Management accounts required if financials are over six months old.
- Six months’ business and personal statements.
- Signed and dated personal balance sheet.
- Letter from the accountant declaring income.
Other requirements include rental income from existing properties, copy of the lease agreements and three months’ bank statements reflecting the rental deposits. Future rental is not considered.
Chetty and Mahomed also said the first thing any lender wants to know is whether an applicant has paid past credit accounts on time. They added that having credit accounts and owing money on them did not necessarily mean that one was a high-risk borrower with a low FICO score.
“FICO scores will consider your mix of credit cards, retail accounts, instalment loans, finance company accounts and mortgage loans,” Chetty said, adding that, in general, a longer credit history will increase one’s FICO scores.
“Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.”