Residential

Self-employed? What you need to know when applying for a home loan

Home Loan generic

Before Covid-19, the property market conditions were geared to favour buyers. The pandemic also saw government lowering the interest rate to a fifty-year low to ease the financial burden on consumers.

This is great news for first-time property buyers. In addition, the threshold on transfer duty was raised to R1 million earlier this year which means that the first R1 million of the value of the property is tax free.

Despite these favourable conditions, financial institutions have very stringent criteria when applying for a home loan. Self-employed applicants, including freelancers, contract workers, sole proprietors, and small business owners, often struggle to qualify for a home loan and they are of the belief that they will never qualify. This is not true.

Kim Hogben, principal at Leapfrog Durban Central says that being organised and having your affairs in order is the first step.

To qualify for a home loan, you need to demonstrate that you can comfortably afford the monthly bond repayments.

The paperwork

You need to ensure that your paperwork is in order before you apply for a bond. This will save you a lot of time and hassle once the process is set in motion.

Typically, the following documents will be requested by the bank:

  • A letter from your accountant confirming your personal monthly income.
  • Financials covering your income and expenditure for the last two years of working or trading.
  • A twelve-month cash flow forecast.
  • A list of assets and liabilities.
  • Personal and business bank statements for at least six months.
  • Your latest IT34 which serves as confirmation from SARS that your tax is in order.
  • Company registration and/ statutory documents, if applicable.
  • ID documents of your fellow business directors, if applicable.

Tax

You need to ensure that your tax is in order. Outstanding tax returns, of whatever nature, will have a detrimental impact on the outcome of your home loan application. Consider recruiting the services of a tax consultant or professional accountant to advise you on how to best go about ensuring that your tax is in order and that your credit worthiness is in good standing.

Your credit records

A clear credit record is the foundation of sound personal financial management, and one of the first things that will be scrutinised when you apply for a home loan,” Hogben explains. Bad credit from defaulting on payments and loans, filling bankruptcy and unpaid judgements, decreases your chances of having your credit application approved.

All South Africans are granted one free credit check per year. “There is no need to panic if your credit record is unfavourable as it is possible to restore it to good health. A certified debt counsellor can assist with this”.

Saving for a deposit

A deposit towards your bond can be a great help in securing your home loan. If you have substantial savings, this demonstrates that you are financially responsible and likely to honour the home loan repayments monthly.

Do not mix personal and professional

Keep your personal and professional finances and admin separate. Tax law allows for certain personal expenses that result from running a business to be claimed rather than as part of a taxable salary, but this could appear as inflating your income which could count against you.

Credit, finance and admin in general can be tricky business, so rather than struggle on alone, recruit the help of the experts – be it a tax consultant, accountant or trusted property advisor,” Hogben emphasises.

“It is also highly advisable to use the services of a bond originator as this increases your chances of success. These consultants assist with the home loan application process and are well versed in the administrative intricacies. They will forward your application to various financial institutions to help secure the best deal” she concludes.