Can a self-employed person get a home loan in South Africa?

 How to get a home loan when you are self-employed

Can a self-employed person gest a home loan in South Africa?

The simple answer is yes. But the bank or the financial institute will have certain requirements that self-employed person has to meet.  These are similar to the rules that registered companies have to follow.
The moment you earn an extra income, the South African Revenue Service sees it as a business income and you are expected to have financial statements and pay taxes. 

Before you apply for a home loan, first find out what amount you qualify. Determine exactly what the bank would need from you before you apply. This would speed up the process and the bank doesn't have to wait for outstanding documents that you probably don't have and still have to search for.

If you're applying for a home loan as a self-employed person, then these tips can streamline the process and increase your chances of approval. These are the things to do before you apply for the home loan.

1. Find out the amount that you qualify for before you start shopping for a house

Financial institutions don't work with sentiments and hope. They don't care if it's your dream home and how much you want to live in that specific house. They only care about the numbers and if you'll be able to repay the monthly bond payments. Before you speak to the estate agent, speak to consultant at the bank to find out the maximum loan amount you qualify for.

It will be very disappointing for both you and the agent when your application gets rejected because you were hoping that the bank would have sympathy, knowing that the house was completely over your budget. Know the amount and don't go over. Deal with the numbers, accept the reality and go for the house you can truly afford. Hope doesn't pay the bond installments and the banks don't offer currencies in emotions.

2. Get a bookkeeper or an accountant

Those financial statements that the bank will need, who do you think will prepare them? And the accountant letter? Well, a bookkeeper or an accountant, that's who. And you'll need an auditor or an independent reviewer to sign off the financial statements. There is no getting away from getting a bookkeeper. Here's another clue: it will cost you way more than R3 000.

Just make sure that you get the right bookkeeper who will prepare the documents according to standards. Don't go for the cheapest. There is no way you can avoid paying the people who have to prepare and sign the financial statements. You also don't have to go for the most expensive one. Just find  a bookkeeper or accountant who can explain the process and give you value for your money. Don't forget: Your financial statements are essential for a successful home loan application.

3. Get your tax affairs in order

The South African Revenue Service might be the one thing standing between you and getting your dream home. The banks now request the ITA34 to prove that you have been filing your taxes and without it they will not process your application. Even if you earn a salary, and have filed your IRP5, you must still file taxes for your separate income. SARS combines your income from your formal employment and the income from your side hustle. All your income must reflect on your tax returns.

If you don't have your efiling log in details, it will delay the process even more. If you don't have a representative, don't ever bother to do it online and forget about calling the SARS call center. Go to a SARS branch without making a booking and register as a representative. It will significantly speed up the process. But if you think it's too much trouble to go to a branch and prefer to call the call center instead, you might be waiting for the next few months. 

Registering a representative on your profile can be a long, drawn out process that can take months if you do it online. But if you go in person, your application will be processed within days. It has become so frustrating to register a representative that some accountants and tax practitioners don't offer the service any more.

Once you have a registered representative on your efiling profile, and you have activated your tax types, the accountant can file your tax returns. 

Even if you owe a truck load of money to SARS, you might still be approved; the tax debt is between you and SARS. The bank just wants proof that you're registered for taxes and that you've been submitting your tax returns.

4. Prepare your proof of income before you apply

As I've said earlier, the bank only looks at your numbers. Those numbers are provided by your financial statements. That is what the bank uses to prove your income and assess if you qualify for the loan.

These financial statements will be proof of your income, expenses, assets and liabilities of the last twenty four months. The bank will request the profit and loss statement, the balance sheet and in some cases the cash flow statement.

Every transaction that reflects on your bank statements will be recorded on the profit and loss statement, except for personal expenses. These will go on the balance sheet as drawings. What you owe and own; and what you contributed to and withdrew from the business, will reflect on the balance sheet. The cash flow statement will show how much cash you have available.

These documents must be prepared by a bookkeeper or an accountant. It must then be reviewed and signed by an auditor or independent reviewer. The person who prepared the financial statements can not sign them off; it has to be a different professional who are qualified to do so.

5. Prepare the accountant letter

The bank might ask that you must present an accountant letter even though  they have signed financial statements. Don't be surprised. 

The accountant letter is a break down of your monthly income and expenses and it must be prepared by your bookkeeper or accountant. This is for the bank to verify that the financial statements correspond with what is reflecting on the bank statements. 

They might request a breakdown of your income and expenses for the last three or six month. The signed financial statements show the business income over two years, and the accountant letter will show the latest figures.

These are just the basic documentation that you'll need when you apply for a home loan as a self employed person. Each bank will have their own criteria; some might even request more documents. That's why you must start the preparation before you apply and not when you apply. 

Get everything ready while you still have enough time. 

Applying for a home loan can be very stressful but if you plan and prepare, the process might be smooth and without bumps. As a self-employed, you can get a home loan but your finances must be in order. It's not a decision that you take today, and then tomorrow you get your house. It takes time. But of your affairs are in order it will reduce the time of the application process by far.

Most importantly, treat your extra income like a business. Operate from a separate bank accounts and track your income and expenses. It will make your life so much easier, and will improve your chances when you want to apply for any loan from a bank.

This post was written by Olivia Sambo, Accountant and Director at Profits and Books. If you need help with your application for a home loan, you can send an email to profitsandbooks@gmail.com or call 064 049 0308