Things to consider when a business owner applies for a home loan

Obtaining a bond as a self-employed individual can appear daunting, however, with adequate preparation and support from professionals, your dream to become a home owner is within reach.

When would the banks regard you as self-employed?

Generally a person would be regarded as self-employed if you own a reasonable enough share or interest in the business for which you work or if you are a Sole Proprietor.  The minimum level of shareholding required to be deemed as ‘self-employed’ differs from bank to bank. A reputable bond originator intimately understands the bank’s requirements and can assist you in obtaining clarity in this regard.

Another important factor is to determine how reliant you are on the income you derive from the business in order to qualify for the home loan you are applying for. This is especially relevant if you have a permanent and salaried job but also derive income from your shareholding in a business.

What documents are required for a bond application by a business owner?

• A letter from your accountant/auditor confirming your personal monthly income.
• Comparative financials noting the income and expenditure of the most recent two years of trading or working.
• Up to date signed management accounts if your financials are less than six months old;
• A cash-flow forecast for the coming 12 months.
• A personal list of assets and liabilities.
• Bank statements of both the business and yourself going back 6 to 12 months (depending on the banks requirements).
• Your most recent ITA34 (notice of income tax assessment from SARS), which confirms that your tax affairs are in order.
• The ID documents of all the Directors, Members or Trustees, where applicable.
• Your Company, Close Corporation or Trust’s statutory and/or registration documents, if applicable.
• A signed and accepted Offer to Purchase with the company details as the purchaser.
• The application form with the full details as required by the bond originator or bank.
• Additional documentation may be requested by each bank as they see fit to be able to verify the income you disclose as well as the financial viability of the company.

Note: In South Africa each application is considered on a case-by-case basis by the Banks, therefore the documents required could differ from bank to bank.

What factors would count in your favour when a business owner applies for a bond?

Certain factors would go a long way in assisting your application to reach a favourable outcome. Such factors include:

• Saving up for a deposit before applying for a loan.  Being in a position to put down at least a 10 – 20% deposit of the purchase price would assist in proving that you are financially responsible, thus reducing your risk profile at the bank.
• Pulling a credit score report prior to applying:  The higher your credit score, the greater the chances of your application being successful. Additionally, it could also affect the interest rate you would have receive on your repayments.
• Ensuring that your business is in a healthy financial position:  The financial statements you submit to the bank must be accurate, up-to-date, complete and in the required format as required by the banks. The financial statements submitted should reflect a business which is self-sustaining, profitable, solvent and have adequate liquidity (the ability of the business to pay off its current liabilities).
• Proof of management of your personal finances.  The income you receive from the business should be consistent and regular as possible.  It is advisable to keep your personal expenses separate from the business’s expenses. Furthermore, your personal income from the business should not only be adequate for you to qualify for the loan amount, but also be deemed sustainable for the business in the long term.

In conclusion, before looking for the perfect home the importance of having your financial affairs and your business’s affairs in order cannot be overstated. Additionally, by preparing the necessary documents beforehand and making use of a bond originator will make the process of applying for a home loan a lot smoother, prevent costly delays down the line, and increase your chances of success.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)