The odds seem to be stacked against small business owners and self-employed entrepreneurs. It’s been found that small business owners and those who are self-employed, including freelancers and contract workers, struggle to get business loans. To add insult to injury, it appears that they also struggle to get home loans. This is according to ooba, a South African-based home financial services specialist.
The decision to buy a home is usually the result of debate, research, desire, and, in some cases, necessity. However the decision is reached, it takes a lot of courage to approach a bank or credit provider and actually ask for a home loan.
Picture this: You’ve been a successful freelancer for five years. You’ve never missed a car payment or an instalment on your credit card, you pay your bills on time, and you keep all of your receipts so that you’re never in trouble with the tax man. In short, you are a model financial citizen; the epitome of economic responsibility. Your partner, who runs his own business, is equally successful. You’re more than financially sound enough to afford a modest home, which is all you want.
You walk into the bank brimming with confidence and leave with your eyes brimming with tears.
What on Earth went wrong?
According to representatives from ooba and First National Bank’s home loans department, self-employed people are not only subjected to greater scrutiny than those who work a regular nine-to-five job, but they are also assessed differently.
Quite simply, they are deemed high-risk and so credit providers need more evidence of their ability to repay a mortgage.
One of the problems, according a home loans expert from Standard Bank South Africa, is that freelancers don’t have a regularly regular income. They might consistently earn over 20k per month, but creditors still get nervous when the amount fluctuates too much (between 20k and 35k, for instance).
Some contract workers are even worse off because their income might be based on seasonable demand. They could make money hand over fist for six months of the year, consistently accumulating more than enough to see them through the other six months (while saving up for a sizeable deposit), and still not impress home loan providers.
You don’t have to join the rat race
All you have to do is take a look around you to see the hordes of self-employed, small business owners living the good life in homes of their own to see that it’s not impossible to get a bond. It’s also not necessary to earn the kind of money that should, technically, negate the need for a mortgage. Here are some tips to help you convince your bank that you’re not as flaky and high-risk as they might think:
- Keep your business finances separate from your personal finances, and keep them both in good order.
- Consider opening a transactional account. You won’t get any interest but it’s a great way to show that you have a regular stream of money flowing in and out (more in than out), which you manage responsibly.
- Steven Barker (Standard Bank South Africa) says that you’ll do yourself an enormous favour if you can provide creditors with proof of future contracts.
- The standard advice regarding deposits applies – the bigger the deposit, the lower the risk for the bank, and the more likely you are to walk away smiling.
- Yvonne Keane-Viljoen (ooba), says that comparative financial records (for at least two years), will stand you in good stead.
- You can’t go wrong with a favourable letter from your auditor, which is possibly the only time you’ll really value her.
It sounds like an awful lot of effort, but don’t let it put you off so much that you rush off to arrange a meeting with your landlord so you can sign a 15-year lease. Your accountant or financial advisor (or auditor) can help you with most of the paperwork. And then there are bond originators, who specialise in helping people get home loans, whether they’re self-employed or not.
The bottom line: with the right preparation – and immaculate paperwork – you can get a home loan.
Jemima Winslow writes for a home finance company that helps first-time home buyers apply for home loans by walking them through the loan application process.