Self Employed Home Loans

It certainly used to be more difficult for a self employed person to get a home loan, but thankfully, this no longer has to be the case. Being self employed has become increasingly common in Australia, with 2.1 million registered business owners and 1.2 million sole traders. As a result, more lenders are coming to appreciate the unique situation that self employed borrowers find themselves in. The key difference in applying for a self employed home loan these days is that you’ll be asked to present your tax returns as proof of income, rather than paperwork from an employer. To give yourself the greatest chance of success it’s a good idea to team up with a broker who has experience in submitting self employed mortgage applications.

Most lenders prefer for a self employed borrower to have been in the same situation for at least two years (as this means they can provide two full years’ worth of tax returns). However, some lenders will consider applications from individuals who have been self employed for less than two years. These lenders specialise in helping shorter term self employed clients, however the deposit amount required is normally higher as is the interest rate.

If you’ve been self employed for less than two years then contact one of our brokers to find out what options could be available to you. Some lenders may assess your eligibility based on how long you’ve been working in a particular industry as opposed to solely how long you’ve been self employed. For example, if you worked as a mechanic for six years as an employee and you’ve now been working as a self employed mechanic for over a year, that may increase your eligibility in the eyes of some lenders. Other lenders may consider applications that come with a deposit of at least 20% of the property price. But individual circumstances will vary and the best course of action is to speak directly with a mortgage broker.

Most lenders will want to see your tax returns for the past few years, rather than proof of a weekly or monthly income. This is good news for self employed borrowers who may experience a more erratic income schedule. In some situations, a lender may also ask for BAS statements or bank statements.

Low Doc loans are a specific type of mortgage product designed for borrowers who don’t have a lot of the traditional supporting documentation typically requested by lenders. They first appeared on the mortgage market in the late 1990s and were offered by non-bank lenders to people who would struggle to qualify for a home loan based on the standard lending criteria. Low Doc loans gradually became more of a mainstream product, and today they are available from most of the big lenders, including the major banks. Low Doc loans can be a great solution for self employed borrowers, but they may also come with higher interest rates or require a larger deposit.

Self employed home loan applications can encounter a range of issues, but the most commonly encountered ones include:

1. A successful business with a clever accountant (where your business is performing better than it appears on paper).
2. Applicants who have been self employed for less than two years continuously.
3. Rapid expansion of the business (resulting in raised eyebrows and a lot of questions from the bank).
4. Banks basing their assessment off the lowest figure shown in your tax returns, not the most recent.

If any of these situations apply to your business then don’t give up hope – many of these issues may be overcome by working with an experienced broker.

As part of the overall assessment of your self employed mortgage application, a lender will take into consideration any unusual expenditures that don’t make up a regular part of your business expenses. This could include the interest you’ve paid on a business loan, depreciation on assets, company vehicle expenses or even additional contributions you’ve made towards your superannuation. Why are add-backs important? Because some lenders will ‘add-back’ the sum of these expenses to get a more accurate idea of your income – but others won’t. Correctly identifying and presenting add-backs can play an important role in determining whether or not a self employed mortgage application is approved.

Don’t worry too much about irregular cash flow. Most lenders now appreciate the fact that when you’re self employed you’ll typically go through a cash flow cycle of feast and famine. This is why it’s important to have your tax returns in order – so that lenders can assess your annual income rather than a weekly or monthly income. But if you have experienced any major fluctuations in income then it helps if you have a reasonable explanation of why.

Applying for a self employed home loan doesn’t have to be stressful. It doesn’t have to be complicated. And it doesn’t mean you have to settle for higher fees and less competitive rates. Start by talking to a mortgage broker who has plenty of experience in working with people who are self employed. They can work with you throughout the entire process to ensure that you achieve the best possible result for your particular circumstances.