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How to qualify for a home loan if you’re self-employed

05 Sep 2018

Buying property is the single largest investment most people ever make, and the majority will need finance in order to do so, but the already laborious home loan application process and its myriad criteria is even more painstaking for the self-employed.

“Applicants should not underestimate the affordability aspect as banks evaluate not only current circumstances, but also future viability and, in some instances, being too ‘credit-worthy’ can negatively impact the outcome,” says McKirby.

This is according to Cheryl Zartz, Property Finance Specialist for Ooba, who says banks are more cautious about granting loans to self-employed home buyers, and they usually require deposits of up to 20%, as well as more documentation than salaried buyers who only need their salary advice and copies of their last three months’ bank statements.

“It is critical that these buyers take the time to familiarise themselves with exactly which documentation is required and what criteria must be met, preferably as far in advance as possible, as certain omissions or errors cannot be remedied overnight,” says Zartz.

“Although the list of requirements may seem formidable, applicants can obtain most of the information from their accountants or bookkeepers, and accredited professionals are aware of what the banks require when applying for home loan finance.”

Zarts says requirements can vary according to the application and the loan amount requested, but self-employed buyers will generally need to provide the following:

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

- A letter from their auditor confirming personal income.

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

- A cash-flow forecast for the ensuing 12 months.

- A personal statement of assets and liabilities.

- Personal and business bank statements.

- Their latest IT34, which is confirmation from SARS that their tax affairs are in order.

- Their company, closed corporation (CC) or trust statutory documents.

- The ID documents of all their business’s directors, members or trustees.

- Depending on the complexity of their application, it may also be useful to provide a short CV.

Zartz advises that its prudent for self-employed buyers to ensure that their financial affairs are in order well before making an offer on a property as it will not only improve their chances of approval, it will also avert costly delays.

“Once an offer to purchase has been made, time really becomes of the essence and mistakes are easily made in haste. Some errors are quickly remedied but others can’t be fixed overnight, and this is when costly delays can occur.”

According to Zarts, the most common errors are:

- Not having all the necessary paperwork in order and up to date (latest financial statements, IT34, etc.).

- Not having their tax affairs in order.

- Being unable to show a clear separation between personal and business expenses.

- Not managing their income and expenses carefully in the months leading up to buying a home to demonstrate to the bank that they have sufficient disposable income to afford the bond repayment.

- Failing to include management accounts and cash-flow forecasts when the latest financial statements are older than six months.

- Not checking their creditworthiness by requesting their free annual credit report from a credit bureau.

Claude McKirby, Southern Suburbs Co-Principal for Lew Geffen Sotheby’s International Realty, cautions that when compiling their applications, buyers should always bear in mind that loan approval ultimately depends on two key factors: a good, proven credit record and being able to afford the monthly instalments.

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“Applicants should not underestimate the affordability aspect as banks evaluate not only current circumstances, but also future viability and, in some instances, being too ‘creditworthy’ can negatively impact the outcome,” says McKirby.

“A prospective buyer who has high credit facilities but does not utilise them is cause for concern as affordability could be significantly impacted by the use of the available credit, especially if business and personal expenses are not completely separate.”

He adds that full disclosure is also critical as a flourishing business and admirable solvency will immediately be eclipsed by an undisclosed previous judgement or insolvency.

It’s also important to remember that the deal isn’t done until the property is finally transferred into your name, and there are a number of potential hurdles and minefields along the way.

Lara Colananni, specialist conveyancing attorney from Guthrie Colananni Attorneys, says bond registration delays are most often due to incomplete or incorrect documentation.

“The main areas of concern are FICA compliance, life insurance and homeowners' insurance, and it’s not uncommon for clients to arrive at the office with no or outdated FICA or incomplete details, especially when lease agreements are used to show proof of address.”

She says incorrect, incomplete or unsigned lease agreements are instantly rejected by the banks, and clients then have to go back to have the agreements corrected which causes delays.

“We also often experience delays when clients fail to produce the necessary additional documentation which must be signed by brokers and doctors, even though these requirements are always set out in the quote from the bank,” says Colananni.

Colananni believes that these errors and omissions are often an oversight due to the fact that people generally have an innate aversion to official paperwork and filling in documents, which is why she always invites her clients to contact her to discuss queries and to go through the requirements with her if they want to ensure that they haven’t missed anything important.

“It’s imperative to carefully read all the details in the correspondence from the banks and lawyers carefully. Implementation is largely the onus of the applicant and they should therefore always strive get their documents ducks in a very neat row sooner rather than later.”

“The additional criteria for self-employed buyers is understandably daunting, however, with the guidance of knowledgeable and experienced property finance specialists and estate agents, it’s possible to seamlessly navigate the potential administrative minefield that acquiring your dream home entails,” says McKirby.

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