Ap­ply­ing for a home loan can be stress­ful, es­pe­cially for en­trepreneurs and free­lancers. 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 er

CityPress - - Tenders -

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.”

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