Home Loans | June 24th, 2023
If you are self-employed and unsure if you will be able to get a home loan, whilst the process might be a little more difficult, home loans for self-employed borrowers are possible. As a self-employed business owner, there is no denying that banks and lenders will typically see you as a higher-risk borrower and require further documentation when it comes to applying for a home loan.
Generally, a lender will want to gather information about your financial position, your income, savings, assets and capacity to pay back a loan. Depending on the lender, how long you have been in business may also be considered. For example, someone who has been in business for many years with a consistent, stable income is likely to be seen as a lower risk than someone who has only been self-employed for one year. To maximise your chances of loan approval, it is advisable to be prepared and engage with a reputable mortgage broker who will be able to navigate the process with you.
Whilst every lender will have their own set of requirements regarding home loans for self-employed people, there are some requirements that are generally standard across the board. This includes documentation of ID and information outlining your assets and liabilities. It is almost guaranteed you will need to provide the below documentation as part of the process:
Most lenders will want to see your last two years of income statements, as well as profit and loss statements, details of the salary you pay yourself and your business’s tax returns.
As a self-employed business owner, your income will likely vary month to month. For this reason, lenders will assess up to the last two years of your income, however many lenders will consider a shorter period if the business income is shown to be increasing.
Lenders will want to ascertain that your income covers your expenses, as this can show your ability to repay a home loan. Details of your debts, assets and monthly expenditures and income will be needed to work out your income-to-expense-ratio.
With any loan application, lenders and banks will conduct a credit check as part of your application. A credit check will outline your credit score, any debts or credit you have, as well as any history of missed payments.
For a ‘full doc’ loan, you will be required to provide the standard amount of documentation as evidence of your income. Whereas a ‘low doc’ or ‘alt doc’ loan (which is often catered toward self-employed borrowers) will require less documentation but often comes with a higher interest rate as it is viewed as a higher risk loan.
For full doc loans, you will need to provide your broker with evidence of the following:
For Alt doc loans, you will need to provide evidence of the following:
When looking at home loans for self-employed borrowers, there are some important things to be aware of. Some lenders will offer specific home loans for self-employed people, whilst other lenders will offer the same products across the board. Depending on the type of the loan and the lender, the interest rate you are charged might be higher or the loan-to-value ratio lower compared to that of a standard borrower.
As a self-employed borrower, the choice of lender may be limited as not all lenders apply the same policies when assessing home loans for self-employed people.
Whilst it isn’t always the case, some lenders will only allow self-employed borrowers to apply for loans with a higher interest rate.
Just as some lenders may only offer home loans for self-employed with higher interest rates, some may also require a larger deposit or high loan-to-value ratio (LVR). LVR refers to the percentage of the property’s value the lender will allow you to borrow. The lower the LVR, the higher the deposit required.
Today, more and more people are working for themselves, either as a freelancer or running a small business. To be classed as self-employed, you will either be an independent contractor servicing one or more clients or companies or operating a business as a sole trader or partnership that may or may not have employees.
Keeping up to date business and personal financial documentation is key. Ensuring you have copies of bank statements, past payslips and other information outlining assets and liabilities will assist with the application process.
It is also important to have up to date documentation, including:
If you have an accountant, you may also want to speak to them and ensure all documentation is up to date. They will also be able to advise you on your deductions, as whilst deductions can reduce your taxable income, having a higher income can be a benefit when applying for a self-employed home loan.
Focussing on increasing your savings will also help when it comes to applying for a self-employed home loan, especially if your income isn’t consistent or is on the lower side. Regularly putting money aside shows that you have additional funds to access if needed to repay your loan and shows your commitment to creating a positive financial position.
Ensuring you have the right documentation and information is important when applying for a home loan as a self-employed borrower. If you are looking to take the next steps forward, avoid rejected applications that can negatively impact your credit score and work with a mortgage broker who understands the home loan process for self-employed borrowers.
As self-employed home loan specialists, if you would like more information on finding the right home or investment loan product to suit your financial situation, contact us today.
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Andrew Bures (CRN 400327) and POZ Pty Ltd (CRN 397267) are credit representatives of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237). All Real Estate services provided by representatives of Townsend Wealth Pty Ltd do so as registered agents of Key Property Solutions (ABN 57 079 109 050) Licenced Real Estate Agency in NSW (Lic No. 1143645), VIC (Lic No.077527L) & QLD (Lic No. 3726002).
The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances. Terms, conditions, fees and charges may apply. Normal lending criteria apply. Rates subject to change. Approved applicants only