Self-employed home loan applications are notoriously more difficult to get approved than other types of applicants – but they don’t have to be. In many instances, self-employed purchasers can afford the bond… it’s just about knowing what the banks are looking for in the documentation. Read the information below and then let our experienced bond originators assist you in the way forward - to get the best possible offer, at the bank that is right for you.

How is affordability assessed?

If a self-employed applicant is purchasing property in their personal capacity, banks will generally only consider the applicant’s drawings from the business as income – this may come in the form of salary, commission, bonuses and/or dividends. They will not use revenue, turnover, or even retained profit of the business itself.

Therefore, it is important to get one of our bond originators to conduct an affordability assessment prior to application – as you may need to motivate for an increase the drawings from the business to an amount suitable to qualify for the bond (so long as the business is able to sustain the increase).

Key documents required

Additional documents for self-employed applicants will be:

• The latest 2 years of audited financial statements (and management accounts for the interim period);
• A letter from your accountant with written confirmation of your income;
• 6 months of business bank statements; and
• 6 months of personal bank statements.

It is therefore essential to have your accounting affairs in order – a good accountant will always pay for themselves in the long run!

Whilst the documents submitted have a lot of data - financial statements can have pages of information, and business bank statements lines of transactions – the banks are essentially only looking at a few key aspects to these documents.

Alignment of self-employed documents

Each of these documents submitted must verify and support the other. There must be total alignment between the documents to support the declared business revenue, as well as the applicant’s declared income.

In terms of the applicant’s income, there must be alignment between:

• The Director’s remuneration in the Financial Statements/Management Accounts;
• The gross monthly income as stated in the Accountant’s Letter; and
• The net monthly income seen as deposits into the Personal Bank Statements.

In terms of the business’ revenue, there must be alignment between:

• The Annual Revenue in the Financial Statements/Management Accounts; and
• The monthly income seen as deposits into the Business Bank Statements.

Accountant’s letter

The accountant’s letter is the key document that must tie the information together, clearly and concisely. The letter should confirm the applicant’s income in a comprehensive manner by the following description:

• Income is clearly stated as Gross or Net, Annual or Monthly;
• If the business pays for expenses on behalf of the client, this must be clearly stated (each expense listed must align with both the financials and the business bank statements);
• If retained earnings are to be included in affordability assessment, the accountant must clearly state the amount available for use (excess must align with the financials and business bank statements); and
• If a Member’s Loan is being paid back to the client and they would like it included as income, the accountant must state this in the letter (alignment with the personal bank statements should be seen).

A comprehensive accountant letter can ensure a quick bond approval, and avoid lengthy delays of going back and forth between the bank and the accountant with queries. Our bond originators will check the documentation for complete-ness to avoid these common delays.

Self-Employed, Fixed Salary – a “Loophole”

From 1 September 2021, Nedbank started accepting applications for self-employed applicants who didn’t have an existing relationship with Nedbank. In addition, self-employed applicants who drew a regular salary from the business could be assessed with the same requirements as a full-time employed applicant.

To qualify for this, applicants would need to be able to provide the following evidence:

• 3 months’ payslips showing gross income, deductions (particularly PAYE) and net income; and
• 3 months’ personal bank statements reflecting the net income deposit on a regular monthly basis.

This is a great streamlined option for those with established businesses drawing a regular salary. Although you may only be applying at one bank, our bond originators will motivate on your behalf to ensure you get the best interest rate, rather than the bank’s standard rate.

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, when there are delays or declines in the bond approval process.

There are many things to consider when you are self-employed, but rest assured that your bond originator will help you better understand your options. Give yourself a choice between multiple offers by applying for a home loan with Phoenix Bonds.

Contact us now to get started!