They sometimes have uncertain or unpredictable flows of income, and the rigours of affordability assessments required by the National Credit Act don’t favour their erratic circumstances. However, not all hope is lost and a deposit can pave the way to affordability and bond credibility, writes Neesa Moodley
Careen Mckinon, provincial sales manager at bond originator ooba, says the home loan application process requires a little bit more effort when you are self-employed or a freelancer. “The lack of a guaranteed income from a single source can make banks anxious about financing a home for you,” she says.
They simply look at you as a higher risk.
According to ooba, 10% of home loan applications received in the third quarter of last year were from self-employed applicants, compared with 11% in the second quarter of last year and 9% in the third quarter of 2014.
This is about half of the 20% level of 2007, indicating that self-employed applicants are generally less confident about their ability to qualify for home finance.
Freelancer Sue Charlton says it wasn’t a problem for her.
“If you ignore the pointy-down faces of estate agents and bank personnel, and get your financials from a tax person/accountant, and supply your banking details, assets and liabilities, and statements, it’s not too bad.
“My experience is that I have not had too bumpy a ride despite the pessimism of some.”
Mckinon says if you do your homework, as with any other bond application, you can increase the chances of your home loan being approved.
Steven Barker, head of home loans at Standard Bank, concurs.
Steps for the self-employed
Get your paperwork in order. The first step is to ensure that all your paperwork is correct. If you are self-employed, Mckinon suggests that you submit the following documents when applying for a home loan:
1. Comparative financials covering your latest two-year trading or working period.
2. A letter from your auditor confirming your personal income.
3. If your financials are more than six months old, you will need up-to-date, signed management accounts.
4. A cash flow forecast for the next 12 months.
5. A personal statement of assets and liabilities.
6. Personal and business bank statements (six to 12 months, depending on the banks’ requirements).
7. Latest IT34, which serves as confirmation from the SA Revenue Service that your tax affairs are in order.
8. Company, cc or trust statutory documents.
9. ID documents for all the directors, members or trustees.
Although this list seems rather daunting, it is all the more reason to use an expert to guide you through the process, as this will get you one step closer to acquiring a home loan.
“It is imperative to have your tax affairs and finances in order and up to date. In addition, it will help to separate your personal and business expenses.”
Mckinon says that self-employed applicants generally undergo a longer home loan approval process than individuals who are not self-employed.
Steps for freelancers
But what happens if you are a freelancer? You earn income from one or more sources, and your income fluctuates from month to month, or even every six months.
Barker says, in general, a freelancer would need to show a track record of an income, and bank statements can usually prove this.
“The problem is that most freelance contracts run over the short term. When it comes to applying for a home loan, the longer your freelance contracts are, the better,” he says.
Just as self-employed individuals need to tick certain boxes to meet banks’ requirements, there are a few things that a freelancer can put in place to ensure that their home loan application is viewed favourably:
1. A freelancer is treated as a sole proprietor, although they are not required to have full annual financial statements.
Mckinon says most of the banks will require that you cumulate your income (add up your income from various sources) and prepare an abridged version of an annual financial statement. “The annual financial statement will need to include, at minimum, an income statement and balance sheet, which should tie into the applicant’s personal annual tax return, being the ITA34.”
2. The income statement and applicant’s personal annual tax return are the best documents to present to the bank, as your income fluctuates month on month and an annual snapshot is more favourable for a freelancer. Based on the financial data in the income statement, the bank is able to see the freelancer’s income and justify it with their annual tax return result, the ITA34.
3. If you want to buy a property, start saving for a deposit. Barker says the home loan application process instantly becomes smoother once the bank sees that you have saved up a deposit. It reduces the risk that the bank is taking. Ideally, you should have a bigger deposit than a typical home loan application. Instead of a 10% deposit, work towards a 20% deposit so that the bank takes only 80% of the loan-to-value risk. “A large deposit undoubtedly weighs the odds in your favour,” Barker says.
4. Is surety an option? “Only as a last resort and even then, we are moving away from the surety model,” Barker says.
Typically, a family member or spouse would offer surety, but the banks tend to prefer a joint ownership structure rather than surety. When someone stands surety for you on a loan, it means that they are undertaking to repay the loan if you default or are unable to meet the loan repayments.
Previously, this was the equivalent of standing guarantor on your loan. However, in terms of the National Credit Act, standing surety for someone has taken on greater significance and can now affect your affordability assessment.
Mckinon says the implication for the surety applicant is that they will be 100% liable, and should they apply to borrow in the future, this mortgage would appear as their liability and may affect their credit status. Also, should the primary applicant default on the mortgage, the surety would be accountable to service the debt.
For example, let’s say Ms Smith wants to take out a R1 million home loan and her brother, Mr Smith, decides to stand surety for her. A year later, he wants to take out his own home loan for R2.5 million, but the surety on his credit profile makes it look as if he has taken out the loan himself.
This would be taken into account when the bank is carrying out an affordability calculation.
5. A freelancer could opt to register a company and build up two to three years of financial records. However, Barker warns, this can become expensive to run. “It’s a very formal arrangement that can have positive spin-offs in the long run, but it should be done with a broader view than simply wanting to access credit,” he says.
“Ultimately, a freelancer wants to be in the position where they have multiple contracts with different clients, where they have built up track records and can assure the bank of future income streams.”
Applying for a home loan can be stressful, especially for entrepreneurs and freelancers.