Getting your home loan approved when you're self employed
There is a perception that it’s harder for self-employed individuals to get a home loan than what it is for a PAYG salaried applicants.
This is completely wrong, yes, there are times when lenders take longer to assess applications from self employed individuals but this is because their income assessment tends to be more complex compared to simple payslip verification.
The fact is, there are lender who will lend to self-employed applicants who have been in business for less then 12 months and there are specialist lenders don’t even require finalised tax returns to work out someone’s self-employed income.
Of course, there are clear advantages of having operated a profitable business for over 2 years. If you’re able to show a lender that you have your tax records in order, you may be able to secure a competitive home loan rate.
The major banks and their secondary brands will only lend to what’s classed as prime applicants, whereas specialist lenders will also consider near prime and non-prime applicants.
Prime borrower – Clear credit history with strong employment history
Near prime – Borrower may have had a minor credit default in the past or someone with a clear credit history but short employment history
Non-prime – Borrower who has had credit difficulties in the past and may even be a discharged bankrupt
Regardless of which category you fall into, if you’re self-employed and are seeking to borrow for a home or are looking to refinance your existing home loan, these are some of the things you need to consider:
Establish your income
When you’re working for someone else, it’s very easy for a potential lender to assess your income and your eligibility for a loan. When you’re working for yourself, the onus is on you to present your collated financial records to the lender for them to assess whether your business generates sufficient income to service the debt required.
Before you apply for a mortgage, talk to your accountant and work out exactly what your TAXABLE income is. Your businesses revenue means little when it comes to borrowing money, the bank wants to see how much you have available to repay your debt i.e., taxable income after you have paid your business expenses.
There is a caveat to above, if your business has an established relationship with lenders business or commercial banking arm, where the bank has in-depth knowledge of your businesses financial risk standing and cashflow projections than they may lend based on revenue.
Provide evidence
It’s not enough for you to tell your potential lender what you make; you’ll need to provide evidence that will satisfy the lenders policy.
Unless you’re an existing customer of the lender, they will want evidence of your personal and the businesses financial standing and for this they will want bank statements, financial statements and tax returns.
When applying with mainstream banks bar one, you’ll need to show your two most recent tax returns. If there is a significant difference in earnings between two years presented, the lender is likely to take the lower of the two years figures and your assessable income and add 20%.
Policies like above can have a negative effect on your borrowing power, that’s why you need to consider getting your home loan through specialist online mortgage platform like loansHub.
Check how your home loan compares
No tax, no home loan
When you run your own business, it’s only natural that you’ll want to look for ways to lower your tax by making your taxable income as small as possible. But this will work against you when you apply for a mortgage.
Here’s the thing, if you are not willing to pay taxes, the banks aren’t willing to lend to you. If you’re struggling to secure a mortgage, it might be worth thinking about paying more tax in the short term to enjoy the long-term benefits of owning property.
Alternatively, you can seek finance from specialist lenders, the advantages are, you’ll get great rates and be able to use alternative documents (ALT DOC loans) to your tax returns for the lender to assess your income. Documents such as bank statements, BAS or accountants’ letter are typically call ALT DOC.
These loans, dependent on lender, can unfortunately have risk fees associated with them as well as have loan to security value (LVR) limits. Meaning you will need to contribute at least 20% or more towards the purchase.
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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.