Are you a sole proprietor, on contract, or a freelancer? Don’t let that put you off applying for a home loan. Here are 6 steps to applying for a home loan if you’re self-employed
1. Find out what kind of finance you qualify for
Based on your average monthly income and expenses, use our bond repayment calculator to find out how much finance you might qualify for.
2. Check your credit score
Check your credit score. If you have short-term debt, do your best to pay that off and increase your creditworthiness.
If you don’t have much of a credit record to speak of, begin by building one up and honoring your monthly repayments on time.
Contact Rawson Finance or your bank or bond originator for advice on improving your credit score before applying for a home loan.
3. Get your business and personal finances in order
It’s logical for small business owners to claim all legitimate expenses to reduce their tax liability.
But, you can’t expect the banks to count any of those expenses as part of your income in order to boost your chances of being approved for a home loan.
If you’re self-employed, it's imperative to ensure that you don’t claim to have more income than that declared to the SA Revenue Service.
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 claim to a bank that you actually earn R400 000 and should qualify for a bigger home loan.
4. Save up for a deposit
Like all prospective borrowers, 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.
Banks 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
5. Compile your documents
The major difference between employed and self-employed home loan applicants is that the employed applicants can provide pay slips, IRP5s and tax returns, while self-employed need other ways to demonstrate their income.
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.
6. Apply through a bond originator
The truth is that it is trickier to apply and be approved for a bond as a self-employed person.
But, this isn’t because the banks don’t want business from people who run their own businesses or work on a contract or commission basis.
Self-employed people are generally subject to the same risk assessment and credit qualification criteria as other potential borrowers, and can secure loans quite readily if they are willing and able to produce certain documents.
The good news is that you can make it very much easier for yourself by applying through a reputable bond originator like Rawson Finance.
A bond originator will give you the correct advice about everything the banks need to be able to evaluate your application, and will also motivate the application and ensure that it is individually assessed on merit.
