It will be tougher to apply for a home loan when you are a sole proprietor, a self-employed professional, a contract worker, or a small business owner. Your personal and financial records will be scrutinised and you have to produce strong evidence of your capability to pay back a home loan, as compared to those who are traditionally employed.
Banks and lending companies view self-employed individuals as a risk since their work is on a part-time or contractual basis and they are therefore assessed differently when applying for a home loan. Self-employed individuals also pose a challenge because the applicant has to satisfy the bank’s criteria for their being able to afford the loan during the low and high months of a year. This might be viewed as discouraging news for self-employed individuals, but there are ways to improve their chances of an application.
Improving the Chances
A good credit history that shows well-managed debts would prove crucial to a home loan application. A self-employed individual, with a goal of buying a house in the future, should start their credit history by getting a credit card or opening store accounts. The timely payments will establish a good credit standing that should be checked every year. Up to date payments on business and individual tax payments are also important.
Opening a savings account with a bank to save up for a deposit will also help in giving a good chance for a loan approval since this will show stable financial responsibility. Saving for a deposit can be as little as 5%, but it would be more favourable if 10% can be reached in order to qualify for a home loan. A larger deposit can also lessen the risk that a bank may see in a self-employed individual. The way to convince banks to approve the loan would be to know you better as an individual that has a capacity to repay loans.
Business loans or a credit overdraft can be one of the ways to acquire a home, but it can also be pointed out that the easiest and most affordable would be through a home loan.
Banks and other financial institutions request for further information, which have to be satisfied in order to get a better chance of applying for a home loan. To this end, self-employed individuals need to submit the following documents:
- A letter from their auditor to confirm their personal income
- A cash flow forecast covering 12 months
- Financial statements for the past two years comparing their working or trading periods
- Personal statements describing their liabilities and assets
- A confirmation from SARS (latest IT34) that the tax affairs of the applicant are updated and in order
- Business and personal bank statements for the past 12 months
- Documents about the company, trust statutory, or CC
- All trustees, members, or directors ID documents
- Updated and signed management accounts if financial records are more than 6 months old
Any financial transactions showing incomes and expenses are important supporting documents that will let banks see the way an individual takes care of their finances.