How the self-employed can overcome the home loans barrier

Being self-employed should not affect your chances of being approved for a home loan – but it often does result in applications being declined, says Mike van Alphen, National Manager of the Rawson Property Group’s bond origination division, Rawson Finance.

“However, this is not because the banks don’t want home loan business from people who run their own businesses or work on a contract or commission basis. In fact, such individuals are generally subject to the same risk assessment and credit qualification criteria as other potential borrowers, and can obtain loans quite readily if they are willing and able to produce certain documents.  

“They can also make things very much easier for themselves if they apply through a reputable bond originator like Rawson Finance that will not only give them the correct advice about everything the banks will require to be able to evaluate their applications, but will also motivate those applications and ensure that they are individually assessed on merit.”

Van Alphen says the number of self-employed people in SA’s formal sector has been on the rise since 2009, and currently stands at between 1,5 million and 2,2 million people, going by the best estimates of the World Bank and the Absa SME Index. “And according to StatsSA, a further 1,5m people are currently running small businesses in the informal sector, so this is not an insignificant issue for the real estate industry.”

The major difference between home loan applicants who are employed and those who are self-employed, he says, is that the employed applicants can usually provide pay slips, IRP5s and tax returns to substantiate their stated income, while self-employed individuals have no such third-party verification.

This means that the banks have to fall back on other ways to assess their earnings and income stability, and will usually use some or all of the following:

- Your annual financial statements and tax assessments for the past three years;
- Personal and business bank statements and a cash-flow summary for the past six months;
- The most recent three months’ management accounts;
- A copy of the lease if you rent your business premises;
- A certified copy of your ID and proof of residence;
- A letter from your accountant attesting to your personal monthly income; and
- A statement of your domestic income and expenditure.

In this regard, van Alphen says self-employed homebuyers should also ensure that they do not claim to have more income than that declared to the SA Revenue Service.

“Of course it’s prudent for small business owners to claim all legitimate expenses to reduce their tax liability. But in all honesty they can’t then expect the banks to count any of those expenses as part of their income in order to boost their chances of being approved for a home loan.” 

“Similarly, if you own a small business that makes R1 million a year, and your financial statements show that your business expenses are R700 000 a year, leaving you with an income of R300 000 declared to SARS for tax purposes, you can’t now claim to a bank that you actually earn R400 000 and should thus qualify for a bigger home loan.”

But like all prospective borrowers, he says, self-employed people can improve their chances of being granted a loan – and at a more favourable rate of interest - if they have cash available to pay a sizeable deposit.

“Lenders always prefer buyers who have the financial discipline to save a deposit and are prepared to invest some of their own money in their homes, because they have been shown to be a better risk, in that they are much less likely to default on a home loan than those with no equity in their properties.”

He cautions, though, that none of this will be of any help if the prospective borrower has a blemished credit record. “Whether they are employed or self-employed, would-be homebuyers should all take the time to check their credit records – and to repair them if necessary – before they even think of applying for a home loan.

“Once again, a reputable bond originator will be able to assist them with this and suggest what they will need to do, but it is never a bad idea for anyone who is planning to buy a home to first work on improving their credit score by eliminating or at least reducing existing debts, and by paying bills on time and in full for six months to a year.”

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