You’ve set your sights on a beautiful new home and you have a good relationship with your bank, so you assume it should be easy to obtain a bond. But it then dawns on you that you’re self-employed.
Being your own boss doesn’t necessarily mean you must abandon the idea of owning a home. The process just looks slightly different. According to ooba, South Africa’s leading bond originator, an average of 12% of their bond approvals are for self-employed individuals.
In this article we take a closer look at what this application process entails.
Your work history actually matters
Mortgage companies and banks want to ensure that you’re capable of paying a mortgage, that your business is generating a stable income and that it’s shown growth over the years.
Your work history also comes into the equation when lenders need to determine your approval amount. This is because they take an average of your earnings for the past few years to determine the mortgage amount you’ll be approved for.
With the absence of a regular salary slip, it becomes a challenge to prove your affordability, and therefore the likelihood of paying back your mortgage within the agreed time frame.
This means that banks have to rely on other means to assess your earnings and income stability, and will usually use most of the following:
• Your annual financial statements and tax assessments for the past two years;
• A signed letter from an auditor confirming your personal income;
• Personal and business bank statements and a cash flow summary for the past six months;
• A statement of assets and liabilities;
• A Tax Clearance Certificate from SARS confirming that your tax is in order (IT34);
• Relevant documents relating to the company, trust or CC;
• ID documents for all directors, trustees or members;
• A copy of the lease if you rent your business premises;
• A certified copy of your ID and proof of residence.
The case for a credit score
As with any loan application, your credit score matters. Make sure your credit score is healthy when applying, and if you are able to settle a significant amount of debt before, do so. It also helps to check your credit report carefully to ensure there are no errors. A lender may also check your business’ credit report, so be sure that it’s under control.
Your monthly finances must be managed carefully to be able to show the appropriate amount of regular and disposable income.
Deductions Can Hurt You
Tax deductions can assist you in lowering your taxable income and your tax bill. But when applying for a bond, these deductions can have a negative effect. Remember that Lenders consider your income after deductions when deciding whether or not to approve your application. If you claim a lot of deductions when doing your taxes, it can actually lower your after-deduction income so considerably that you may not qualify for a bond.
ooba recommends the importance of clearly defining your taxable drawing, paying the tax due and then servicing all personal expenses with your net income. It is imperative that the bank is able to see that your net profit, post expenses, is directly in line with your earnings.
While obtaining a mortgage when you’re self-employed may seem like a lot to digest, it certainly is possible. With a clean credit record, the correct paperwork in place, and a low debt to income ratio, there’s a good chance your application will be successful.