Being self-employed means you’re high risk

If you’re a self-employed, a freelancer, contract worker, sole proprietor or small business owner, chances are you may have a tough time trying to secure a home loan.

Yvonne Keane-Viljoen, property finance consultant at ooba, says that self-employed individuals will be scrutinised and have to provide more evidence of their ability to pay back a home loan than their traditionally employed counterparts.

Ewald Kellerman, FNB home loans head of sales, explains employed and self-employed individuals are assessed differently for home loan funding, as they pose different forms of risk.

Steven Barker, head of home loans at Standard Bank South Africa, explains that “most self-employed individuals work on a contract basis or part-time basis, and therefore income over a period of time must be measured and verified to support repayment of the loan.” Even though an employed individual can also lose their job, “the ability to define their income, verify it and use it as a source to support repayment is easier than for a self-employed individual,” he says.

Permanently employed individuals earn a fixed salary and therefore offer a higher level of certainty. Kellerman says that “we are able to rely on the salary quoted on the payslip to make a good decision on their ability to repay the loan that we are assessing the applicant.”

He says that the bank also differentiates between individuals who earn overtime, commission or a similar form of variable income and those who own their own businesses. Kellerman explains that the strength of the business will be assessed to ensure that a business owner would be able to service the loan.

He adds that businesses present a unique challenge because they pay themselves only what they need due to tax purposes. The bank would assess the company to see whether it could pay the owner enough to be able to repay the loan.

Similarly, Barker adds that what is important to the bank is to understand the income and expenses of the applicant. Self-employed individuals present a great challenge because “the bank has to satisfy itself that the applicant can afford the loan in the high and the low months,” says Kellerman.

Keane-Viljoen says that while this should not discourage home loan applicants, they need to be well-prepared when making an application to improve their chances.

So how do you improve your chances?

Keane-Viljoen points out banks would want to see that the applicant can manage their debts therefore having a credit history is important and advises that opening store accounts, getting a credit card and ensuring that it is up to date on payments would be useful.

This would result in a good credit record. Individuals can check their credit record once a year for free to find out what their credit history looks like. She adds that ensuring that individual and business tax payments are up to date is important too.

Barker says that having a transactional account that reflects income and expenses is important, as well as providing supporting information that indicates how an individual manages their finances.

He adds that providing the bank with proof of future contracts that would generate income is also helpful. Effectively “the more the bank knows about you and your ability to repay, the stronger your chances are of getting a favourable loan offer,” Barker says.

Potential applicants can also prequalify for a home loan by having their income, expenditure and credit record checked in advance to assess whether they can afford the repayments. Saving up for a deposit will also be useful, says Keane-Viljoen, as this would indicate financial responsibility and improve their risk assessment.

Kellerman says that a larger deposit can compensate for the additional risk that a bank takes on and advises applicants “to save a minimum of 5%, but preferably 10% or more to qualify for a home loan.”

There are other options to consider, such as a credit-like overdraft or a business loan, but Kellerman points out that the most affordable and easiest way to buying property [is through a home loan].

So for now self-employed individuals will have to put up with banks' requests for more information in order to assess their risk.

Keane-Viljoen says that self-employed individuals have to submit the following documents:

1. Comparative financials covering a trading or working period of the latest two years

2. Letter from their auditor confirming personal income

3. If their financials are more than six months old, they will need up-to-date, signed management accounts

4. Cash flow forecast for the ensuing 12 months

5. Personal statement of assets and liabilities

6. Personal and business bank statements (Absa requires the latest 12 months, the other banks require six)

7. Latest IT34 , which is confirmation from Sars that the applicant’s tax affairs are in order

8. Company, CC or trust statutory documents

9. ID documents for all the directors, members or trustees.


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