Stricter loan criteria for independent bond seekers in South Africa

The impact of the pandemic on small and medium-sized businesses in South Africa is clearly demonstrated by the drop in the number of bail applications filed by independent applicants since the initial lockdown in March last year.

That’s according to Kay Geldenhuys, head of sales execution at Ooba, who says that in the 24 months leading up to the pandemic, an average of 12% of their applicants came from this industry, with the figure dropping to 8% in June, only three months later.

“Independent applicants currently represent an average of 10% of our volumes, this increase being largely due to the fact that some lenders apply less stringent administrative criteria to assess independent applicants who can demonstrate that they derive the same regular monthly income from their business. . .

“In these cases, the lender will not require financial statements to assess the strength of the business, but will rely on a letter from the accountant of the business owner confirming the monthly withdrawals that will be compared to the income posted on personal bank account. of the business owner, ”Geldenhuys said.

Freelance applicants in medicine, accounting and law are generally typical freelance applicants who earn a regular monthly income and therefore can apply for a home loan with less paperwork than before, Ooba said.

“Banks are, however, very cautious with independent applicants who operate in sectors most affected by the pandemic lockdown – such as the hospitality industry, tourism and exports.

“Given that there is no indication on when the foreclosure risk will end, as well as the poor economic outlook and rising interest rates, we don’t expect banks to relax. . their criteria for self-employed loans. “

Buying a home is the biggest investment most people have ever made and most will need financing to do it, but the already laborious bond application process and its myriad of criteria are even more laborious. for the self-employed, said Cobus Odendaal, CEO of Lew Geffen Sotheby’s International Realty in Johannesburg and Randburg.

“Banks are generally more cautious when granting loans to these homebuyers and they generally require larger deposits and more documents than salaried buyers who only need their advice and salary copies. their bank statements for the past three months. “

He said it’s prudent for independent buyers to make sure their financial affairs are in order well before bidding on a property, as this will not only improve their chances of getting approved, but will also prevent costly delays. .

“Once an offer to buy has been made, the time is really short and it’s easy to rush mistakes. Some mistakes are corrected quickly, but others cannot be corrected overnight and that is when costly delays can arise.

According to Geldenhuys, the most common mistakes are:

  • Not having all the necessary documents in order and up to date (latest financial statements, IT34, etc.);
  • Not having your tax affairs in order;
  • Being unable to show a clear separation between personal and business expenses;
  • Failure to carefully manage income and expenses in the months preceding the purchase of a home to prove to the bank that they have sufficient disposable income to repay the deposit;
  • Do not include management accounts and cash flow forecasts when the last financial statements are more than six months old;
  • Do not check their creditworthiness by requesting their free annual credit report from a credit bureau such as TransUnion.

“Assessing the bank’s affordability on self-employed applications involves assessing whether the candidate’s business is generating stable income and has grown over the years.

“So the bank will want to see the applicant’s taxable monthly withdrawals and cover all personal expenses with net income. They need to be able to see that the bottom line of the business, after expenses, is directly in line with the profits reported by the business owner, ”Geldenhuys said.

Independent applicants should ensure that they are able to provide the bank with their most recent financial statements and management accounts, in addition to current bank statements. “It is prudent for potential applicants to institute the practice of separating their personal expenses from their professional expenses. “

Odendaal said the main areas of concern are often FICA compliance, life insurance and home insurance and that it is not uncommon for clients to arrive with non-existent or outdated FICA documents or incomplete details, especially when rental contracts are used to prove the address. .

“Incorrect, incomplete or unsigned documents like rental contracts are instantly rejected by banks and customers then have to go back to have contracts corrected, which, of course, leads to delays. “

Odendaal believes that errors and omissions are often overlooked due to the fact that people generally have an innate aversion to official documents and to filling out documents.

“It is imperative to carefully read all the details of correspondence from banks and lawyers. Implementation is largely the applicant’s responsibility and so they should always strive to put their documentary ducks in a very orderly row as soon as possible.

“The additional criteria for independent buyers are understandably intimidating; However, with the guidance of knowledgeable and experienced real estate finance specialists and real estate agents, it is possible to seamlessly navigate the potential administrative minefield of acquiring your dream home, ”said Odendaal.

Read: Marriage, divorce and property changes under review for South Africa


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