Banks are usually more cautious about granting loans to self-employed homebuyers, so it’s prudent that these buyers have their financial affairs and paperwork in order well before making an offer on a property.
The impact of the pandemic on small and medium-sized businesses in South Africa is clearly evidenced by the decline in the number of bond applications made by self-employed applicants since the initial lock-down in March last year, says Kay Geldenhuys, head of sales fulfilment, ooba.
In the 24 months prior to the pandemic, an average of 12% of their applicants were from this sector with the figure dropping to 8% in June, just three months later.
“Self-employed applicants are currently averaging 10% of our volumes with the increase largely due to the fact that some lenders are applying less strict paperwork criteria in assessing self-employed applicants who can demonstrate that they draw the same regular monthly income from their businesses,” says Geldenhuys.
“In these cases, the lender will not require financial statements to assess the strength of the business but will rely on a letter from the business owner’s accountant confirming the monthly drawings which will be matched to income displaying in the business owner’s personal banking account.”
Self-employed applicants in the medical, accounting, and law fields are typically self-employed applicants who draw a regular monthly income and can therefore apply for home loan finance with less paperwork than before.
Banks are, however, being very cautious with self-employed applicants who operate in those industries worst impacted by the pandemic lock-down, such as the hospitality industry, tourism and exports.
“Given that there’s no real indication when the risk of lock-down will recede, together with the poor economic outlook and rising interest rates, we do not expect banks to relax their self-employed lending criteria,” Geldenhuys says.
More paper woes for the self-employed
“Buying property is the single largest investment most people will ever make and the majority will need finance to do so, but the already-laborious bond application process and its myriad criteria is even more painstaking for the self-employed,” says Cobus Odendaal, CEO, Lew Geffen Sotheby’s International Realty in Johannesburg and Randburg.
“Banks are usually more cautious about granting loans to these homebuyers and they usually require larger deposits as well as more documentation than salaried buyers who only need their salary advice and copies of their last three months bank statements.”
Typical paperwork issues
According to Geldenhuys, the most common errors self-employed loan applicants make, are:
- Not having all the necessary paperwork in order and up to date (latest financial statements, IT34, etc.)
- Not having their tax affairs in order
- Being unable to show a clear separation between personal and business expenses
- Not managing their income and expenses carefully in the months leading up to buying a home to demonstrate to the bank that they have sufficient disposable income to afford the bond repayment
- Failing to include management accounts and cash-flow forecasts when the latest financial statements are older than six months
- Not having a credit report from a credit bureau
Odendaal says main areas of concern are often FICA compliance, life insurance and homeowner’s insurance. It’s not uncommon for clients to arrive with no or outdated FICA documents or incomplete details, especially when lease agreements are used to show proof of address. “Incorrect, incomplete or unsigned documents like lease agreements are instantly rejected by the banks and clients then have to go back to have the agreements corrected which, of course, causes delays,” he says.
It’s imperative to read all the details in the correspondence from the banks and lawyers carefully. Implementation is largely the onus of the applicant and they should therefore strive to get their documentative ducks in a very neat row sooner rather than later.