Self-employed applicants are considered ‘high risk” by banks because they tend to have unstable incomes. So proving you can afford to pay off a home loan can be an exercise in frustration.
Of course, if you are employed by a self-employed person, you will probably get a bond fairly easily by presenting your contract as proof of salary – even though you’re relying on the income of a self-employed person. Ironic, isn’t it?
According to bond originator ooba, South Africans are struggling to have their home loan applications approved – statistics show that 57,9% of self-employed applicants had their bond declined in the 2009/10 financial year, an increase of 2,4% compared to 2008/09. This compares with a 3,5% fall in the decline ratio for employed applicants in 2009/10 to 48,1%, from a 51,5% decline ratio the previous year.
If you’ve approached the bank and your application has been turned down, you have probably resigned yourself to renting, but you could consider approaching a bond originator, simply because it is their job to find you the best home-loan deal around.
How does a bond originator work?
Rhys Dyer, chief operating officer at ooba, explains.
“The bond originator takes the hassle out of submitting the home loan application, as the bond originator deals with the bank application forms. The bond originator will typically submit the bond application to more than one bank, giving the homebuyer the best chance of getting a home loan, and at the best rate. If the bond application is successful, the bond originator will receive a commission from the bank granting the home loan.”
There is no cost to the prospective buyer, and he or she is under no obligation to accept a loan sourced by the originator.
Saul Geffen, CEO of ooba, says: “The wide variances in the credit requirements and decline ratios across the banks illustrate the growing importance of applying to multiple lenders. In the last financial year, there was a 32% difference between the banks with the highest and lowest average decline rates.”
Ooba’s oobarometer shows that the ratio of applications declined by one lender but approved by another increased, up 11,2% from August last year to 30,4% in August this year.
If you do decide to go this route, here’s what you should do:
- Have your paperwork in order – current payslips, bank statements and so on. “This means having your signed financial statements for the last two years available and your management accounts up to date,” says Dyer. “If the information isn’t to hand, any delays could result in the home buying opportunity being missed.”
- Ask for a pre-qualification check. The home loan the homebuyer will qualify for is determined by the banks using an “affordability” calculation. This looks at the homebuyer’s income and expenses, with the differential being known as net surplus income. A home finance expert can assist the homebuyer with a pre-qualification check to give a guideline as to the size of home loan that the homebuyer is likely to qualify for before putting an offer in on a home.
- Work out what size deposit you can afford. Generally speaking, putting down a deposit will improve the home loan rate that you can qualify for, and also improve your chances of being granted a loan.
- “Stress-test” your budget to ensure you’ll be able to meet your mortgage repayments if the prime lending rate starts to rise. “Mortgage loans are usually linked to the prime lending rate. As the prime lending rate declines or increases, the mortgage loan rate will similarly decline or increase. Banks do generally factor into their affordability calculations the impact of likely short term interest rate changes. A home finance expert can assist you in determining what your bond repayments would be at higher interest rates,” said Dyer.