HOW TO GET A HOME LOAN IF YOU'RE SELF EMPLOYED?

You know you’re good for it, but without the correct documentation, banks don’t feel as confident as you do. What can the self-employed purchaser do to prove their worth beyond a shadow of doubt, and seal or improve chances of securing that home loan?

For anybody who’s assumed that self-employment is no barrier to raising a home loan...you’re right and you’re wrong. Ironic really. Given the country’s unemployment rate and the government’s hearty encouragement of entrepreneurial activity, it’s frustrating that your journey to securing a home loan should be tougher. But, not unlike those who struggle for home loans because they have no debt or history of debt, the self-employed have a more challenging time than the traditionally employed. 

And that’s why you need to do your homework very thoroughly, or better still, ask the experts to do it for you.

Bond originators, OOBA, have some very solid hints and tips for the self employed, and they know the banks’ criteria intimately. They’ll also make sure you supply all the (strictly) required documents to support your application. It’s essential you meet the requirements to raise a home loan BEFORE you start house hunting and certainly before you make an offer to purchase. It’s not worth the disappointment and frustration for both buyers and sellers, and in many instances, it’s about knowing what is needed. 

PS. There’s another advantage to working through a bond originator. OOBA shops around on your behalf. It stands to reason, like everything in life...your bank already has your business, other banks will be keen to woo you.

ARE YOU REALLY SELF-EMPLOYED (according to the bank’s definition)?

Before anything, you have to ascertain that the bank deems you self-employed. It boils down to: Do you have a shareholding in the business where you work and, if so, what is the percentage of the shareholding in the business?

Simple calculation? Not quite.

Banks have differing levels of shareholding in which they deem you to be self-employed - this varies from 9% to 19%.

If you’re a commission earner who does not have shares in the company where you earn commission, you are NOT self employed; just as a director who draws a salary is NOT deemed salaried if he has a reasonable shareholding in the company.

It’s important to determine upfront if you will be deemed self-employed by the banks, and the easy way to do so, is to deal with those who know the different banks and their requirements.

IN ESSENCE, WHAT DO YOU NEED?

A full, up-to-date financial history of the business, and this includes:

• at least 2 to 3 years updated business financials
• business and personal bank statements
• a letter of drawings from the accountant. 

NOTE: If you are unable to provide audited financials (that is, a sole proprietorship), banks generally also call for ITA34 forms. These are the assessed tax results for the last few tax years and therefore the income as accepted by the Receiver of Revenue, generally accepted as income by the banks (even if the business financials are reflecting higher drawings).

Without the up-to-date records, banks cannot make an informed credit decision. They need to analyse updated business financials and possibly recent management accounts (depending on how soon after the end of the tax year the application is made.)  The financials must be signed and compared against business and personal bank statements and letter of drawings, so that drawings and net profit can be justified. 

NOTE: Just providing bank statements for a self-employed application will be rejected by the banks. Bank statements only verify turnover and expenses, and can never attest to the financial health of the business and its solvency.

AND ANOTHER THING: If you, the self-employed applicant, is purchasing a residential property in your personal name, banks will generally only consider the current member/shareholder’s drawings/salary from business as income and not “retained profit” in the business. So, it may be necessary for you to consider increasing the drawings from business to an amount suitable to qualify for the bond amount required, if the business is able to sustain such increased drawings.

THE TRUTH AND NOTHING BUT

If your business has been operating for less than two years, you’re unlikely to secure mortgage bond finance.

The top five reasons why self-employed applications are rejected or declined by banks:

• Not supplying the banks with the documents required (that is, outdated financials or no management accounts when the financials are older than 6 months or business too new to assess (that is, operating less than 2 years).
• Using turnover of the company as income (that is, bank statements only).
• Income declared not being reflected on the income statement or bank statements, especially director’s remuneration.
• Insufficient drawings declared.
• Unaudited financial statements and no ITA34 to verify income where financials are unaudited.

PREAPPROVAL – SAVES FRUSTRATION AND DISAPPOINTMENT

Best advice is Get Advice. If you chat to OOBA, they’re at the rock face and can tell whether you’re in a strong position or not, and what the different banks will insist upon to increase your chances of securing the loan.

They can also give you advice on how to improve your situation, and therefore your application. They’ll also help you gather everything required, and submit it on your behalf. 

Know what your situation is before you find that dream home. Before you even begin looking for it.