The effects of the 2008 recession had lending institutions employ stricter screening policies in approving loan applications. However, the continuous growth of the SME market resulted in an increase in the number of self-employed individuals applying for mortgages and other types of home loans. This development made financial institutions rethink about the stringent guidelines they follow in offering mortgages to self-employed applicants.
Applying for a mortgage as a self-employed worker is difficult to do. Oftentimes, your loan application will be declined even if you have the means to pay off the loan. So what do you need to do in order to get your mortgage application as a self-employed individual approved by lenders?
Getting Your Mortgage
1. Separate your personal and business accounts
If you have a business, make sure you manage your finances using two separate accounts: one for personal use and the other for business use only. Mixing the two will only create headaches for you in the long run.
Banks will also look at your net monthly income rather than the gross turnover of your business. Any debt your company has should be cleared to maintain a healthy credit record.
When applying for a mortgage as a self-employed individual, you have to present both your business and personal bank account statements. They should show at least 6 months’ worth of transaction history.
2. Have your papers ready
Regardless if you’re employed or self-employed, you have to prepare all the necessary documents before applying for a mortgage.
- Your financials for the past two years
- Auditor’s letter validating your personal income
- Statement of assets and liabilities
- Forecast of your cash flow for the next 12 months
- Business and personal bank account statements for the past 12 months
- Copies of the IDs of your board members, trustees, and directors
- Trust statutory documents
- IT34 confirming your tax filings
The criteria used in screening mortgage applications from self-employed individuals is the same as those used for employed ones. The only thing that separates them are the documents required, which may be more challenging for freelancers to produce.
Banks and other lenders may do extensive research on your financial profile since you don’t have payslips that can prove your income stability. They may look at your yearly financial statements and years’ worth of tax assessments.
If you own a business, both your business and personal bank statements may be examined for your cash flow status. If you’re dealing with international transactions, copies of your expenditures and domestic income may also be required to be submitted. Your business permit and a copy of your lease may also be requested as a prerequisite.
3. Keep a healthy credit record
Banks and a number of alternative lenders conduct credit checks on loan applicants. Mortgages for self-employed individuals are no exception.
Before applying for a mortgage, both self-employed and employed individuals need to double-check their credit records and make sure they have a good rating. As a South African citizen, you’re entitled to check your credit score once a year for free. Use this to get an overview of how your credit score is doing.
It will be extremely difficult, if not impossible, for you to apply for a mortgage as a self-employed worker if you don’t have a good credit record to back your finances. It’s strongly suggested that you get small loans first and build your credit rating from there. This will make it easier for you to apply for a mortgage when creditors see that you’re capable of handling monthly loan repayments.
If you have any judgments or unpaid debts, it’s best to settle them first to clear your record.
4. Make sure your finances are in order
Aside from having a good credit record, putting in a large sum of deposit on your mortgage will make you look good on lenders. They’ll see that you’re willing to invest a sizeable amount of money just to get the mortgage request approved. If you do this, you might be able to get a better interest rate on your loan.
Lenders look at the cash flow consistency of applicants applying for a mortgage. With this in mind, make sure your financial records show you’re earning enough to pay for the property you want to purchase. It should show how you’re saving up for months or years just so you can afford the house.
5. Get a pre-qualification
Pre-qualification is the process of getting your creditworthiness assessed in advance. This can make it easier for you to apply for a mortgage as a self-employed worker.
Applying directly for a home loan you can’t afford can impact your credit rating. When you undergo pre-qualification, you’ll get the chance to resolve any issues on your credit profile and have your financials assessed before you apply for a mortgage. In addition to that, your pre-qualifying agent can help you find the best mortgage deals and negotiate prices with property sellers.