Self employed home loans

Our in-depth guide to home loans for self employed people

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.

What kinds of documentation will I need to apply for a self-employed home loan?

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:

  • One or two years’ worth of business tax returns
  • One or Two years worth of personal tax returns
  • Your most recent notice of assessment from the Australian Taxation Office
  • Two years worth of business bank and financial statements

What other things will lenders want to see for mortgages for self-employed?

Information regarding your income

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.

Income consistency

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.

Income-to-expense ratios

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.

Credit check

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.

Types of home loans for self-employed people

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:

  • The previous two years tax returns and notice of assessments. However In some cases the lender will consider only the most recent year

For Alt doc loans, you will need to provide evidence of the following:

  • ABN registration for 6 months
  • GST registration for 6 months
  • Declaration of your financial position plus either the previous six months’ worth of bank statements or six months of business statements, i.e., BAS
  • A declaration from your accountant as to your personal income or business performance

Key things to be aware of with a home loan for self-employed borrowers

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.

Less choice when it comes to lenders

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.

Potentially higher interest rates

Whilst it isn’t always the case, some lenders will only allow self-employed borrowers to apply for loans with a higher interest rate.

You may need a higher deposit

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.

How do I know if I qualify for a self-employed home loan?

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.

What can I do to be prepared?

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:

  • ABN and GST details
  • Business financials – profit and loss statements and balance sheets for the last two years
  • The last two years of your business’s tax returns
  • ATO portal details

 

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.

Applying for a self-employed home loan

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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