What is the bond approval process, and why does it matter in real estate transactions? This article provides an overview of the bond approval process, illustrates how bond approval clauses are typically worded in an Offer to Purchase, and clarifies the definition of "bond approval" under the National Credit Act (NCA).
The bond approval process in South Africa has several steps which include:
1. Bond pre-qualification (optional).
Prior to house hunting, potential buyers can get pre-qualified through a bond originator or directly from the financial institution (bank). This helps to determine affordability and provides an estimate of the home loan amount you may qualify for.
2. Home loan application.
Once the buyer signs an offer to purchase (OTP) and the seller accepts it, the buyer then applies for a home loan. A buyer can apply:
- Directly to the bank via their private banker or a home loan consultant.
- Through a bond originator who collects all their data and submits applications to multiple banks. There is usually a fee involved when applying through a bond originator however they do usually get the best deals.
3. Affordability assessments and credit checks
After the banks have received all your financial information (usually three months' pay slips and bank statements), the bank will conduct a series of assessments to determine current and future affordability. You will be asked to consent to the bank checking your credit history and score. The bank will do a "desk top" property valuation to ensure there is sufficient value in the property.
4. Conditional / provisional approval (approval on its normal terms and conditions)
In this instance the home loan has been approved in principle but there are conditions attached to it, for example, the buyer needs to provide additional two months' pay slips or an existing debt needs to be settled first, or a physical valuation of the property is required.
5. Final approval letter
A grant letter is issued by the bank to the buyer, the buyer usually signs this document and sends it back to the bank to accept the terms thereof.
Once the terms are accepted by the buyer the bank will issue a quotation and loan agreement also referred to as a pre-agreement statement and quotation.
OTP bond approval clauses often state that the bond approval condition will be satisfied or met as soon as a home loan has been granted OR once a home loan has been approved in principle for a minimum amount of money.
This is perfect if there are no disputes, however, if either party wants to get out of the deal for any reason – how unambiguous, concise, as well as, how in line this clause is with the prescripts of the NCA, can determine whether the deal will fall through or not.
According to the National Credit Act (the NCA) the bank offering a home loan to a buyer does not constitute the granting of a bond. It is only after the buyer has accepted the terms on which it has been granted and the bank issues the buyer with a quotation and loan agreement, which too must be accepted, has the bond been granted in accordance with the NCA.
When drafting or reviewing your bond approval clause in your OTP, to err on the side of caution, the wording of the clause should be very specific, unambiguous and conform to the NCA as much possible.
Looking for clarity on your bond approval clause or ensuring your agreement complies with the NCA?
Our property law specialists can review, refine, or draft your documents to safeguard your interests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
