Self-employed? Just stick to the rules if you want a bond

In the wake of the Covid-19 pandemic, an increasing number of prospective home buyers are self-employed, either by choice or from necessity, and while this should not be an obstacle to obtaining a home loan, they should not expect banks to read their financial statements any differently than the SA Revenue Service does.

For example, if you own a small business that makes R5m a year, and your financial statements show that your business expenses are R4m a year, leaving you with a profit/ income of R1m, you can't expect the banks to believe that that you actually earn R2m and should thus qualify for a bigger home loan. 

Of course, most banks understand that it's prudent for the self-employed to claim all legitimate expenses to reduce their tax liability, and they are used to dealing with an ever-increasing number of people who have either decided to start their own business after experiencing the greater freedom of working remotely since the onset of the pandemic, or have simply had to start their own business after losing their employment.

It is also not true, the banks say, that they are especially reluctant to lend to self-employed people or that they impose tougher credit qualification requirements on such individuals than on those with corporate or public service jobs.

They say that the self-employed are subject to exactly the same risk assessment procedures as all other potential borrowers - although the documents that are requested to verify income may be different.

And the other side of that coin is that they cannot then be expected to bend their rules just because a home loan applicant is self-employed - so they still can't count any money stated as income for the purpose of qualifying for a home loan if you're reporting that same money to SARS as a business expense.

Like other applicants, self-employed people will also have a better chance of being granted a home loan if they have a good credit record, and are prepared to put down a sizeable deposit on their new home. Lenders are always more inclined to advance credit - and to be reasonable about interest rates - when prospective borrowers can demonstrate financial discipline and are prepared to invest at least some money in their own homes.

Self-employed home buyers who would like a quick decision on a home loan application should also ensure that they have at least the following prepared:

+ Six months' personal and business bank statements, if applying to more than one bank;

+ A comprehensive income / expenditure statement, especially if they are first-time buyers or wish to borrow more than 80% of the purchase price; 

+ Their latest business and/ or personal financial statements as well as the business management accounts for the current year, all attested by their accountant; and

+ Their latest tax assessments showing that they are not in arrears with income tax payments or VAT (if applicable). 

 In addition, they will greatly increase their chances of being granted a loan if they apply through a reputable bond originator who can submit their application to several banks and motivate it personally. By doing this they will also ensure that they are offered the best possible interest rate according to their own financial situation.