UGANDA, Kampala | Real Muloodi News | If you are in the market to for a home loan, banks will first need to assess your credit worthiness before deciding whether or not they will lend to you.
Your credit worthiness is your ability to cover your home loan payments. To evaluate this, lenders will look for evidence that you earn enough income to pay back the home loan, for evidence that you pay your bills to other lenders, and will review how much debt you already have. They will also assess the value of the land or property you are looking to build or buy, as this asset is usually held as security by the bank in the event you fail to honour your loan payments.
If you are an employed salary earner, you are likely to find it easier to obtain a bank loan because you can provide your pay slips from your employer as evidence that you have a regular and stable income. Likewise, if you have a track record of successfully managing and repaying past debts, including loans and credit card debt, you will more likely be eligible for that home loan.
However, the majority of Ugandans are part of the ‘informal economy,’ meaning they are not paid an official salary or else they operate a cash business, making it harder to get loans. For the same reason, most don’t have any kind of credit history either.
If you fall into this category, then there are some things you can do to improve your credit worthiness:
1. Regular Savings History
You can start by opening up a savings account with your bank and making regular and consistent deposits into it. Your bank statements showing your savings history proves that you have the ability to make regular payments towards repaying a home loan.
Most banks require you to provide a 20% cash down-payment toward the home loan, before financing other 80%.
Therefore, saving for the deposit using a bank account and regular and consistent payments can not only help you build up the required deposit, it helps to establish your credit worthiness.
2. Payment of Utility or Other Bills
Payment history plays a key role in determining your creditworthiness. Lenders generally don’t extend credit to someone who has a history of late payments, missed payments, and overall financial irresponsibility.
Therefore, it’s important to pay all of your bills; even electricity, water, or internet, when they’re due. Make sure you get current on any late payments or set up payment plans to pay off past due debt.
Producing records of a reliable and consistent payment history with other providers can to help demonstrate your credit worthiness.
3. Take Small Loans or Lines of Credit… and Pay Them Back
Your payment history paying back loans or other lines of credit has the biggest impact on your credit worthiness.
However, this can be something of a Catch-22: To qualify for most loans, you need to have a credit history. But without a credit card or other type of loan, you can’t build a credit history.
Obtaining a credit card allows banks to record one’s credit information to the credit reference bureau, as security for the loan. It contains information on a borrower’s payment history for all loans processed by any financial institution, and it may be accessed by any bank when determining a borrower’s creditworthiness.
One option for people with little or no credit history is to apply for a secured credit card with the bank.
Secured credit cards require a security deposit – typically equal to your desired credit limit – to get approved. In most cases, you’ll get the deposit back after you close the account in the future.
Once you obtain your new secured credit card, there are two golden rules to keep in mind as you work on establishing your credit history:
- Make the minimum repayment on time, every time.
- Keep your balance low; try to keep it at least below 30% at all times. To accomplish this, especially if you have a low credit limit, use the card sparingly or make multiple payments throughout the month.
The goal is to build a strong credit history. Failure to adhere to these two rules could result in a negative credit history and actually make it harder to get the home loan.
4. Evidence of Income Earned
A bank will assess all of your income streams when determining if you earn enough money to pay bank the loan. If you are paid by regular paycheck or direct deposit, you can use your recent pay stubs as proof of income.
However, if you get paid in cash, or operate a cash business, it can be very difficult to prove your income – a bank is not going to just take you at your word at how much cash you earned, without some evidence to back it up.
While no one likes paying taxes, declaring your income and paying income tax to the URA provides solid proof of the income you earned, upon which you use can secure a loan. Likewise, if you earn rental income, declaring this income with the taxman contributes to your creditworthiness. In this sense, paying taxes can be an investment toward securing credit.
The amount of income tax you pay can be reduced by claiming tax-deductible expenses incurred in the process of earning that income. For example, any withholding tax (WHT) that has been withheld on payments made to you, is considered a payment towards your tax burden that can be claimed on your end-of-year tax return.
Another example involves rental income. From July 1st this year, non-individual landlords (businesses) will be subject to a tax of 30% on rental income earned, however such landlords can reduce their tax burden by claiming up to 50% of rental income earned in expenditure and losses incurred in the production of that rental income.
Expenses that can be claimed include the cost of repairs, ground rent and property rates paid to the local government, fees paid to a property manager, costs to advertise and market the property, utility bills and expenses, and bad debts. It is also important to maintain proper records of expenses incurred.
Whereas non-individual landlords, the first USh2,820,000 you earn is tax-free, and then you will be charged a flat rate of 12% tax, with no deductible expenses.
As a landlord in Uganda, one of the most effective means to elevate your loan application is tax compliance. Lenders can use this to determine your income and your ability to pay back.
5. Avoid Unnecessary Borrowing:
Once you start getting some momentum with building your credit, you may be tempted to apply for more credit cards or loans. While adding more tradelines, or accounts, to your credit report can help improve your scores, going into debt unnecessarily could make things worse in the long run.
Building credit can take time, but the benefits home loans can bring to grow your real estate portfolio are worth the effort.
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