While becoming self-employed can be one of the keys to financial success and independence – and a better life all round – unfortunately in the beginning lenders don’t necessarily see it that way.
In the early days of working for yourself, sourcing self-employed home loans can be harder than it really needs to be.
At Intuitive Finance one of our specialities is self-employed home loans so in this article we will take your through some of the ins and outs of the process so being your own boss is seen as a positive by lenders, which of course it should be!
What types of loans are on offer?
There a number of home loans available for the self-employed, including a few different ones which are popular amongst people working for themselves.
One of the most popular self-employed home loans is something that’s called a low-doc loan.
A low documentation (low doc) home loan is a loan aimed at those who can’t provide the usual required paperwork such as tax returns and financial statements when applying for a home loan.
This includes self-employed borrowers or investors without a regular PAYG income.
Rather than having to provide payslips, you can usually self-certify your income by providing statements from your accountant, recent Business Activity Statements, or a self-signed income declaration form.
It’s important to understand, however, that low-doc home loans can attract higher interest rates than a standard variable home loan.
If you’re borrowings are above a loan-to-value ratio of 60/40 then you will often also have to pay lenders mortgage insurance.
One of the most common home loans for investors especially are interest-only loans, which means that the loan repayment is only the equivalent of the what the interest amount is every payment period (weekly, fortnightly or monthly).
This is popular for investors, of course, because it is only the interest component that is tax deductible.
Homeowners and investors looking for more stability in regards to their mortgage repayments also often consider fixed rate home loans.
This type of loan locks in an agreed interest rate for a specified period of time, typically from one to five years.
While this type of home loan does provide a fixed repayment amount, it also means that any changes in interest rate (up or down) are not taken into account, which can be good or bad depending on which way it does.
In Australia, one of the most common home loans is a variable rate loan, which means that the interest rate charged on the mortgage changes depending on any interest rate movements by the Reserve Bank of Australia or the lender.
So your repayments might go up or as is the case in Australia at the moment, it might go down.
What do I need?
Intuitive Finance is an expert at sourcing self-employed home loans for our clients so when it comes what documentation you need to show a potential lender, we will help you prepare this information well beforehand.
The type of documentation that self-employed people need to provide lenders includes:
- 2 years financials statements including your profit & loss statement, balance sheet and business tax returns
- Your personal tax returns plus ATO assessment notices for the past 2 financial years
- A signed Borrower’s Income Declaration
- Your registered business name
- Your ABN
- Your Business Activity Statements for the past 12 months
- Proof that you’ve been successfully running your business for the past two years
- Proof of your 20 per cent deposit.
How do lenders calculate my income?
Unfortunately, policies across lenders can vary significantly and this can be especially true for the self-employed.
But, forearmed is forewarned, so having an insight into how lenders might calculate your self-employed income puts you on the best footing from the very beginning.
Most lenders believe that by looking at your past tax returns they can predict how stable your business will be in the future.
Banks and non-bank lenders alike tend to be very wary if you have an income that has increased or decreased by a large amount in the past two years.
- One lender may use the lowest of the income figures for the past two years.
- Another may use the most recent year’s income as shown on your tax return only and not average the 2 years.
- Some may even average the two years income or take 120 per cent of the lowest year’s income.
- They may or may not then add back expenses shown on your returns.
- They may simply rely on just the most recent year.
It’s important to remember that lenders will be looking for a steady income over time more than any other attribute.
Lenders can have the view that self-employed borrowers represent a higher risk because their income isn’t as stable.
For this reason, lenders complete a more thorough assessment of home loan applications from business owners than standard employees.
How can I increase my chances of approval?
While it might seem like sourcing self-employed home loans is harder than it should be, please don’t lose heart!
With expert assistance and guidance, as well as improving your chances of approval, then there is every chance that your application will be successful.
There are a number of ways that the self-employed can increase their chances of gaining finance approval.
Some of the factors that help lenders to look favourably on a self-employed applicant include:
- One of the easiest ways to enhance your financial picture is to have a clean credit history, which means paying off any debts and reducing your credit card limit. Many people falsely believe it is the debt on their credit cards that lenders assess, but it’s actually the total of their limits, regardless of how much debt they have. Consider, reducing the number of credit cards you have as well as lowering their limits.
- Lenders will generally need to see official documentation of income for the self-employed. So, it’s imperative to keep your tax returns up to date so you have the paperwork available to easily provide during the lending application process.
- As we mentioned in a previous section, lenders like it when an applicant’s income is consistent, without big highs and lows. So, consider paying yourself a set salary, regardless of the income your business is generating. This way, the lender can see that every pay period you are receiving a set stable amount.
- More and more homeowners and investors are using mortgage brokers today so consider talking to one of them because they know the ins and outs of the lending sector better than almost anyone and can help you choose which lender is the best for your financial circumstances.
- As we all know, one of the keys to financial success and independence is to have a budget and most importantly to stick to it! So, every month, know what your outgoings are and try to financially operate within these parameters. Big impulse purchases might seem like a good idea at the time, but lenders rarely view them favourably.
*The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.
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