Many people have questions on getting a home loan when self-employed. The process is a bit more complex than a home loan when you are employed but with a bit of effort you can set yourself and have a good chance at getting a loan.
Buying a house is at the top of the priority list for many a savvy business person who feel that renting is a cost that does not build one’s own asset base. Historically, getting a home loan has proven difficult for many self-employed people because of lenders’ preference to a permanent salary over the variable income and lack of guarantee with self-employed borrowers.
With the rise of the gig economy more and more people across the world are moving from conventional permanent jobs to freelancing and consulting. With these changes, lenders are beginning to change their policies and being more accepting of self-employed people than in previous years.
While there is still some ways to go for us to get easier conditions, things are looking better and if you have your stuff in order, you can get a home loan as a freelancer.
How To Get A Home Loan When Self-Employed?
Have Your Paperwork In Order
While banks are keen for your business and are willing to lend money to all trustworthy borrowers. One of the key things that separates salaried employees from the self-employed is that salaried employees have a payslip which serves as verification from a third party of income.
Because the self-employed often don’t have a pay slip, you must do a bit more to prove the bank that you are earning an income that can be relied on for a foreseeable future to finance your home loan. Have the following documentation in place before pursuing a home loan.
For preparation of your paperwork, it is ideal that you have an account (3rd party) who will prepare your self-employed accounts. These have to be in order and up to date, and signed off by an auditor. Providing information that is out of date is one of the common reasons for declining of loans.
Checklist For Self-Employed Home Loan
- Comparative financials covering a trading or working period of the latest two years.
- A letter from your auditor confirming your personal income.
- If your financials are more than six months old, you will need up-to-date signed management accounts.
- A cash-flow forecast for the ensuing 12 months.
- A personal statement of assets and liabilities.
- Personal and business bank statements (six to 12 months, depending on the bank).
- Your latest IT34, which is confirmation from SARS that your tax affairs are in order.
- Your company, closed-corporation (CC) or Trust statutory documents.
- The ID documents of all your business’s directors, members or trustees.
- Depending on the complexity of your application, it may also be useful to provide a short CV.
You must ideally have two years or more’s financial history and records in the optimal scenario but if you have been self-employed for less than two years that does not mean that all hope is lost. A lot of the consideration takes specific circumstances into account and a bank might offer a specialised offer in circumstances that it deems justified.
This offer could perhaps offer the loan but at a higher interest rate than usual. For example, if you were previously employed and moved into self-employment in that same field as a consultant, a lender can take your work history prior to the self-employment into account.
When it comes to obtaining a loan, it always helps to have a good credit score. Ensure that you have a strong credit score. It is even more crucial for business people and freelancers as you are already not on equal standing with your salaried counterparts.
If you are a South African with a valid RSA ID is on FNB’s online banking app, you can check your creditworthiness using the nav>>money feature. It gives you an indication of your credit score with specific regard to home loan eligibility.
Also, be sure to look at the “How to improve my credit status” section as it has some useful tips on improving your credit status.
If you qualify it can guide you through your home loan application in 10 minutes. ClearScore also gives you free access to your credit score.
Save A Deposit
This is a very good way to put yourself in a favourable light with the bank. When you can save up a sizable deposit for you your home loan, it shows that bank that you are not totally reliant on external finance. It indicates a higher dedication to the loan because when you put up a deposit you share sharing in the risk that the bank faces.
Save up a deposit of at least 10% before starting the loan application process. Many bond originators recommend 20% as an ideal. The higher the bond the more positive it looks so if you can save up even more then do that.
Prequalify For A Home Loan
Prequalification is an assessment that either the bank or a home loan broker does on you based on your finance to determine if you qualify for a home loan and how much you qualify for. You can do prequalification through your bank or through a mortgage broker. I have sought prequalification through both my bank and a mortgage broker and each have their pros and cons, although I preferred the result from the mortgage broker. Through the bank, you can do it through an app which is quite impersonal and doses not give you the opportunity to ask questions.
I applied for pre-qualification through a mortgage broker and I was assigned an agent who gave me the information that I needed and it was good to be able to ask questions on things I was uncertain of. After getting my prequalification, I received an email that came with an attached infographic that outlined the home loan application process. This is really nice and helpful for first-time buyers and I found it quite exciting.
Home Loan Brokers
It is always good to be self-sufficient and do many things yourself but in certain instances there are lot of advantages to letting professionals do what they are qualified in for you. Mortgage brokers’s skills come in handy when looking for home financing. Even though they come a cost, they can provide a lot of advantages that can lead to more positive outcome for a client.
Jumping from bank to bank to apply for a loan can hurt your credit rating because every application will require a hard enquiry on your credit status. This is why it is a good idea to use a mortgage broker who will advise you on the best way to proceed and manage the whole process for you.
Mortgage brokers have direct relationships with lenders and can therefore have timely information that you would not have access to on your own. For example, a lender might be looking to finance more people at a specific time and a mortgage broker can point you in the right direction at the right time which can get you a loan, and under more favourable terms than would be the norm. They can also negotiate for you to get you the best possible deal for your given circumstances.
For a good mortgage broker, you can contact Ooba through their website. They will offer you advice and will manage your home loan application at no cost to you at all.
Avoiding the red flags
When you apply for a loan, you can expect potential lenders to scrutinize your financial behaviour. It is good idea that in the six-month leading up to your home application, that you be as conservative as possible in your spending and that you do not do any unnecessary spending.
There are also red flag actions that you should avoid such as online gambling, and the spending of money in ways that suggest financial strain or recklessness.
Opening Multiple Lines of Credit – This suggests a high probability either financial stress or risky borrowing habits. Keep lines of credit to a minimum to show that you can afford what you spend on.
Large Undocumented Deposits – Large sums going through your account in the period that lenders address should be documented. For example, if you receive a large deposit from a family member to help with a deposit, if it is a loan it would have implications on your credit standing. If it is a gift, it would have to be fairly documented as such as well.
Last-minute purchases – making a big purchase after you have made a loan but before the loan process has completed can throw off your income to debt ration and lead to the declining of your loan application.
Fluctuating overtime and bonuses – when applying for a loan you might reasonably be motivated to work overtime in order to have more to show for the application. A possible risk is the lender will check your history for two years and if your income fluctuates too wildly, it could negatively impact your profile as a borrower. For your application you want to list income that you earn consistently.
Too many “hard inquiries” – Hard enquiries are when a potential lender reviews your credit profile because you have made an application for credit. Too many of these in a short time span affect your credit score negatively.
Applying for a home loan when you are self-employed is a more complex process but it is not impossible. Self-employed applications are under a lot more scrutiny than applications from employees but it can be done. You just need to do the proper preparations and have a good credit rating.