You’re ready to apply for a home loan and you know you’re lender wants to see your payslips and tax returns…
But what if your income comes from your own business?
Applying for a mortgage when you’re self-employed is different to your standard loan application, with an emphasis on proving you have a consistent income and can make regular repayments.
Here we explain the differences in the application process for self-employed people, required documentation and tips to show you’re a reliable borrower.
What Makes You a Self-Employed Borrower?
You are self employed if you earn income from your own business rather than salary or wages from an employer.
While standard potential borrowers have their financial position assessed to determine loan eligibility, self employed people with have both their personal financial circumstances and that of their business evaluated.
Lenders will consider how long you have been operating your business and it’s performance over time.
Self employed people include:
- Sole traders
- Partnerships
- Business owners
Differences in Applying for a Mortgage When Self-Employed
Home loans for self-employed borrowers differ from the standard PAYG applicant due to self-employed borrowers commonly have fluctuating or variable income of self employment.
Many lenders will have stricter lending criteria and may limit the types of loans available to business owners, sole traders and self-employed customers.
One of the biggest pain points is the onerous additional paperwork required for a self-employed home loan application. This may include income verification, business documentation and creditworthiness documentation. Some lenders offer low doc home loans to ease the application process for a self-employed home loan, meaning you can spend less hours filling out paperwork and more hours on your business.
Likewise, some lenders will offer lower loan-to-value ratio (LVR) loans to self employed borrowers, meaning a larger deposit is required. Self-employed home loans may also require lenders mortgage insurance (LMI) to be paid, which protects the lender in the event that you’re unable to make home loan repayments and the property needs to be sold.
But here’s the good part:
Being self-employed doesn’t automatically mean you will have a higher interest rate. Lenders offer loans at their discretion, and in some cases will offer the same loans, with the same principal and interest repayments, to both standard borrowers and self-employed borrowers.
For established self-employed individuals who have a good home loan repayment history and are looking to refinance their home loan, the process is far more simple.
With Homestar Finance, they will only be required to provide 6-12 months of recent personal bank statements reflecting their regular salary deposits and home loan repayments. They will not be required to provide onerous personal and business income verification documents. Established self-employment criteria is based on having an active ABN for two or more years.
The first step is proving that you are a reliable borrower with the capacity to make loan repayments.
How to Show You’re a Reliable Borrower
Usually, there are extra steps and documentation required to prove that you can service a self-employed home loan.
Here’s a few tips to show you’re a reliable borrower:
Maintain organised and accurate records:
Keep records of everything including transactions, contracts and invoices. Have a system in place to keep information organised.
Pay down any personal debts:
Improve your credit score by making extra repayments towards, or completely paying off, any debts. A strong credit score could mitigate some of the risks associated with a variable income.
Separate your finances:
Keep business finances separate from your personal finances.
Save for a bigger deposit:
The more money you have to put down as a deposit, the less you will need to borrow, making your loan potentially lower risk.
By following these steps, you could increase your chances of being approved for a home loan.
Required Documents for Self-Employed Mortgage Applications
Requirements vary between lenders, with different documentation required depending on whether you are a sole trader or in a business partnership, company or trust.
Generally, you will need to provide:
- Your business ABN and date of registration
- ATO Notices of Assessment for the last 2 years
- Tax Returns for the last 2 years
- Bank statements/ Savings history
- Balance sheet and profit loss statements
- Details of external liabilities including company loans, leases and overdrafts
- Information on existing assets including vehicles, property
If you have been self employed for less than two years you may not be able to fulfil the above criteria, however there are avenues for newly self-employed people to be approved for a home loan.
Potential Issues if You’re New to Being Self-Employed
Generally, lenders will require your business to have been trading for at least 2 financial years to be eligible for a self-employed home loan. But don’t despair; there may be alternative ways to qualify.
If you do not have 2 ATO Notices of Assessment, you may be able to provide alternative evidence that your business and income is stable.
This could include previous employment history and references to show your income history prior to starting your own business, sometimes referred to as a ‘low doc home loan’. A low doc loan may be beneficial to self-employed people who can’t provide the full 2 years of ATO notices or tax returns.
Note: not all lenders will offer this type of loan.
Using alternative sources to prove your income stability may attract a higher interest rate and more limitations in the maximum loan-to-value ratio (LVR), due to increased risk assessed by the lender, meaning a higher deposit is required to compensate for the increased risk.
Summary
Whether you’re a PAYG employee or self-employed, there are a range of variable and fixed rate home loans options available. Proving your income stability and financial situation is key for any home loan application, with extra financial statements required for self employed home loan applications.
The team at Homestar Finance can chat with you about your unique position and determine your borrowing power; get in touch today!
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