Self-employed individual – Applying for a home loan as a self-employed individual

Feb 8, 2021 | Featured, Home Buyers

Natasha Champion

About Natasha…

Natasha started her career in home loans in 2003. Having held various positions in this sector, she’s gained experience in multiple facets of the industry, including developments, high net-worth clients, and sales management. Building client relationships based on service excellence remains Natasha’s core passion, and she’s inspired daily by successful deal-making and empowering South Africans to own their own homes.

 

After reading this Q&A, you will know:

  1. Why a self-employed individual should engage the services of a bond originator earlier rather than later.
  2. What documentation a self-employed person needs to successfully apply for a home loan.
  3. Why it’s so important to have a good accountant and tax consultant in your court.
  4. How to apply for a joint home loan if you’re self-employed and your spouse is employed full-time, or vice versa?
  5. Why it’s best to apply for your home loan through a bond originator, especially if you’re self-employed.
  6. How to get started after reading this article.

Self-employed individual – Applying for a home loan as a self-employed individual

I hear of so many self-employed individuals who struggle to secure a home loan. Some of these people are successful business people with great balance sheets and credit records. This can be very discouraging, especially if you’re working hard, you’re a successful small business owner, your credit score is looking good, and you know you can afford the property that you’re hoping to buy.

So where do things go wrong? What’s preventing these individuals from buying their dream homes or starting or growing a property investment portfolio? I couldn’t think of anyone better to assist us with these questions than one of South Africa’s highly acclaimed home-loan consultants, Natasha Champion.

 

The Property Dude:

Natasha, thank you so much for taking the time out to help us with this matter. Hopefully, after reading this Q&A most self-employed people will have a better understanding of what’s required, and how to successfully apply for their home loan. Let’s get started.

Many self-employed people or contract workers believe that it’s impossible or very difficult to obtain a home loan. But is it perhaps just a question of getting their ducks in a row? Please shed some light on this.

Natasha:

The key to a successful home-loan application is preparation. The earlier you engage with an expert on the process, the better. Once you know exactly what’s required, it may take a while to prepare the documentation.

 

The Property Dude:

I agree: We don’t know what we don’t know, and clarity isn’t just power, it’s also a great starting point. If you’re self-employed and you know that you’d like to buy a home within the next year, consult your bond originator or home loan expert quite early. Once you know what’s required and what you can afford, you can start planning accordingly – whether it’s getting your accounting in order, or even starting to explore an additional income stream for your business.

Natasha, on the topic of an additional income stream: a self-employed person’s income changes from month to month. How does the bank determine affordability with a variable income?

 

Natasha:

The bank will work on the average earnings over the last 12 months – these need to be verifiable in bank statements, financial documents, and tax returns.

The Property Dude:

So, I suppose as a self-employed individual, a tax consultant and an accountant are two key people to have on your team when you apply for a home loan. Why are these two people so crucial to getting a home loan approved by the bank?

 

Natasha:

Self-employed individual – Applying for a home loan as a self-employed individual.

As a self-employed individual, it’s crucial that your earnings and operation expenses are recorded on a monthly basis in order for the banks to verify them against tax returns and bank statements. These finance professionals are trained to ensure this is done correctly and consistently.

 

The Property Dude:

And I suppose even if you’re just starting out with your business venture, and you’re not making much money yet, you want to have an accountant and a tax consultant because they’ll make sure all your documentation is in order from day one. These experts are also part of your power team in your business. If you tell them that you’re thinking of buying a property in the near future, they’ll advise strategically on your finances. So don’t be afraid to spend money on these services. My motto in business is always, “Don’t look at the price of the shovel when you’re busy digging for gold.”

Natasha, the part of the application that really discourages a lot of self-employed people is getting their documents together. How can this task be made less daunting?

 

Natasha:

All the information the banks require should be in place already (regardless of whether you’re applying for a home loan or not). Think of getting organized as the best way to operate your business and not a chore – enlist professionals to assist.

 

The Property Dude:

Self-employed individual – Applying for a home loan as a self-employed individual.

Let’s unpack what these documents are, and why the bank requires them before they can process your home loan application. Firstly, banks are looking for the business’s financial statements. Why are these so important?

 

Natasha:

Financial statements are used to verify declared earnings and gauge the solvency of the business.

 

The Property Dude:

In other words, the banks can immediately see whether the business is financially successful or not. And again, financial statements are documents that can only be prepared and issued by your accountant.

Next, the bank also needs a tax assessment for the past three years. What does this mean?

 

Natasha:

A salaried individual will receive a monthly payslip, while a self-employed individual requires a different document to confirm monthly earnings and tax compliance – these are known and personal Ita34s and are generated by SARS.

 

The Property Dude:

Self-employed individual – Applying for a home loan as a self-employed individual.

This is where having a tax consultant comes in handy. You don’t need to know where and how to obtain these documents. You simply just ask your tax consultant, while you focus on doing what you do best, and that’s growing your business.

Then the bank needs personal and business bank statements and a cash-flow summary for the past six months. Please shed some light.

 

Natasha:

The bank statements are used to verify declared earnings and expenses, and the management accounts will be required if the financials are older than three months.

 

The Property Dude:

The bank also requires a letter from the accountant. What information are they looking for in this letter?

 

Natasha:

Confirmation of monthly withdrawals as well as any personal expenses paid by the company on the applicant’s behalf.

 

The Property Dude:

And finally, banks also require an income statement. Why can these individuals not just submit bank statements like salaried individuals?

 

Natasha:

The banks will request a personal balance sheet, which incorporates personal assets and liabilities and income and expenditure. Self-employed applicants may have more than one source of income.

 

The Property Dude:

No wonder so many self-employed individuals become discouraged – so much is required. That’s why speaking to your bond originator before you even start house-hunting is best. And have your accountant and tax consultant in your court to provide you with all the documentation.

Then: A sizable deposit also makes the case of a self-employed individual stronger. What’s considered a sizable deposit and why does it help?

 

Natasha:

If the application is in the name of a legal entity, the banks may request a 20% deposit. But if the application is in the client’s personal name, a 10% deposit will assist in a preferential outcome.

 

The Property Dude:

Again, your accountant can assist with this because they know your financial situation best and know to analyze your affordability from a strategic point of view.

It often happens that with married couples, one party is self-employed while the other party is salaried. How would the application process work in this case?

 

Natasha:

Each applicant would provide the documents applicable to their respective employment status.

 

The Property Dude:

That would be as we’ve just discussed: For the self-employed spouse, that would be all the above documentation, and for the employed spouse, the bank would be looking at three months’ payslips and three months’ bank statements. But if the employed spouse works for a commission or part of their earnings is commission, the banks require six months’ pay slips and six months’ bank statements.

Natasha, self-employed people have a better chance of getting approved for the bond if they apply through a bond originator instead of going directly to their own bank. Why is this?

 

Natasha:

Altogether 42% of applications that are declined by one bank, are approved by another – because we (the bond originator) submit (the application) to multiple lenders (banks). The client (applicant) has access to more options.

 

The Property Dude:

And just so that people understand: The services of a bond originator are completely free? This is also where most people would say, “Where’s the catch because there’s no such thing as a free lunch?”

 

Natasha:  

That’s correct. The bank that grants the loan pays us (bond originators) for administrating the application.

 

The Property Dude:

As a bond originator, do you have any last piece of advice for self-employed individuals when it comes to their home-loan applications?  

 

Natasha:

Partner with a home loan comparison service as early as possible to best prepare your application and double your chances of a successful outcome.

 

The Property Dude:

Just to clarify: A home loan comparison service is a bond origination company, like the one you’re representing.

 

Natasha, thank you for taking the time. We value your expert advice and insights.

If you are a self-employed individual and you would like to get clarity on your affordability, you can contact Natasha directly at natasha.champion@ooba.co.za. Their services are free. They get paid by the bank that grants you the loan, so you have absolutely nothing to lose. Happy house-hunting and all the best with your application form.

 

Contact The Property Dude for more info.

(Updated 06 March 2023)

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