Fluctuations in income have always plagued the self-employed when it comes to securing a loan of any type. Yet despite the current low interest rates, and economic sentiment favouring the buyer, this category of workers remains doubtful that an application for a home loan will be approved. Putting them at rest is Julian Pick, National Manager: Credit Solutioning and Pricing at Absa.
“An inherent aspect of being self-employed is not earning a regular income, but all that means is that this type of loan application requires special consideration, and at Absa we always try to find more reasons to grant one than not. This attitude aligns well with the National Credit Act (NCA) of 2005, which promotes a fair and non-discriminatory marketplace for access to consumer credit, and among other detail, also ensures responsible credit granting.”
Like any applicant, the self-employed, when applying for a home loan, has to go through an assessment of eligibility, which is heavily reliant on documentation and numbers. What the financial lender is most interested in, is whether the borrower can afford the home loan in the long-term, usually over 20 years. This is designed to protect the bank against the applicant defaulting but also to protect the consumer from over-commitment where debt is concerned.
The paperwork
“The NCA requires us to ensure that we properly assess repayment-ability at the point of application,” explains Pick. “For those with regular jobs and a steady income, this is proven by the submission of, for example, proof of income, credit rating, and banking history. However, for the self-employed, or sole proprietor, whose earnings are irregular and/or whose assets are tied up in the business, there are additional submissions.”
Pick lists those: “In instances where the self-employed applicant is a trading business, we require what is commonly called the ‘financials’, which are formal records of the financial activities of a business; an IT34 from SARS to show how much income was earned during a particular period; bank statements, which will also reflect the monthly withdrawn income if that is the case; and proof of annual profits.”
Credit ratings are important
Over and above, the bank will also check the credit rating of a self-employed individual. “This is important because it informs a financier how the individual manages and pays current debts, which is a good indicator of how future debts will be handled,” says Pick. “A good credit rating also accommodates a higher loan value and a better interest rate.”
Provided the self-employed individual uses a bank-authorised credit bureau, the applicant can apply for one free credit check. By doing this before the application of the home loan, the applicant will be able to plan, and if necessary, improve the credit rating over time, which makes eligibility far more favourable.
Sole proprietors
Sole proprietors also fall into the category of the self-employed but there is no real difference in terms of being assessed, except of course that personal finance and business income are inseparable. “Sole proprietors are the business and vice versa, in which case we take the combined income and expenses into account,” confirms Pick.
Where there is a difference for a sole proprietor lies in the financials. Bearing in mind that it is very difficult to prove the sustainability of income based on just one year, some banks will ask for several years’ statements. “Absa requires the last two years’ financials,” says Pick. “On top of the usual bank statements and IT34, a sole proprietor must also supply a letter from a professional bookkeeper, accountant or auditor, stating a breakdown of income.”
This is all well and good, except that the year 2020, and ongoing 2021 Covid-19 lockdown levels had significant, and largely a negative impact on the self-employed, so while previously their business’s may show them to be historically excellent candidates for a home loan, circumstances beyond their control may have thrown their eligibility status into doubt.
“If the flow of income has been negatively impacted, it is important to discuss this with the financier and creditors and make whatever arrangements are necessary to stabilise. Those arrangements must be supported by a serious commitment in terms of meeting timeous payments if the applicant is intent on securing a home loan.
“However where no arrangements were made or not met, this has a negative impact on a credit record and could impact any future requests for finance,” says Pick. “In instances where personal income was under pressure, a business owner might have resorted to dipping into the income of the business even if it was just for survival, in which case the business could be adversely affected. It is therefore vitally important for a small business or the self-employed to have a ‘buffer’ of at least three months to cover fixed expenses.”
When you can’t meet your home loan commitment
Assuming that a self-employed individual has been granted a home loan, one of the best ways to ensure that repayments are met should a medical condition or circumstance prevent them from earning an income, is an insurance policy, of which Absa provides several options. “Such a policy like a keyman should be in place, but this is at the discretion of the client, who can consult with our Absa Life Insurance experts.
“Regardless, Absa will always look at what arrangements can be made regarding the payment of the monthly instalments depending on the permanency of the injury or inability to work. In the absence of our client not being able to make any sort of arrangement, we offer the Help-U-Sell solution, whereby Absa lists the property via a panel of authorised estate agents. Two of the benefits include a reduction in arrear rates and taxes and a reduction in the shortfall based on certain criteria.”
Checklist
In summary, Julian Pick has provided a seven-point checklist that will put the self-employed in a good position to secure a successful application:
Collate all the necessary documentation
Set up good financial habits.
Monitor your books. Ensure that financial information is up-to-date and available.
Ensure that taxes are in order.
Properly manage your finances: both the business and the owner’s.
Keep good business credit by paying debts timeously.
Be honest.
