These days, more and more Aussies are working for themselves. Self-employment can be a rewarding and fulfilling career choice, but it can also pose a few challenges when it comes to securing a home loan.
Most traditional lenders want to see a stable employment track record and can have strict requirements for borrowers who aren’t employed by a company. But this doesn’t mean you can’t be approved for a mortgage if you’re self-employed. Although there are different regulations in place, self-employed individuals are approved for home loans every day.
In this guide, we’ll explore the various options for self-employed home loans. This includes how lenders will view your application differently, what documentation you may need to provide and alternative options. If you’re operating as a sole trader, partnership, company or trust and looking to buy a home, keep reading for our best tips to get a mortgage.
Lenders will view your application differently when you’re self-employed. No matter how stable your business may be, many banks and lenders consider self-employment to be an unstable form of income and will consider you a higher risk.
This doesn’t mean that you will be offered a different interest rate as customers on a salary – it just means that the way you demonstrate your taxable income will be different.
Unlike employees, lenders won’t just be looking at your personal financial situation but will also examine your business’s finances. While most lenders only want to see pay slips for the past few months, they normally require self-employed home loan applicants to have been in business for at least two years. In their eyes, this reduces the risk of income uncertainty as you’re able to provide more proof of a stable income.
Remember, lenders just want to be assured that you can make your repayments. So to be approved you must provide documentation that proves to lenders that you’re a safe investment and can make your repayments on time.
You will have to provide some extra documentation when applying for a home loan if you’re self-employed. This includes the usual personal financial information required when applying for a mortgage as well as evidence of your business’s financial position.
Documents you might need to provide include:
The exact documents you need will depend on the lender. The most important thing is that you’re able to provide proof of a consistent income and that your business is stable and has a long-term trend of increased earnings.
If you have any unusual activity in your history, such as switching from a partnership to a sole trader, a letter from your accountant can also be considered by a lender.
If you’ve been self-employed for less than a year, there’s a chance that most lenders won’t approve your application. This is for two reasons.
Firstly, you won’t have any tax returns to prove your income. Secondly, new businesses are considered to be financially unstable, which puts you at a higher risk.
That said, there are still options available if you’ve been self-employed for less than a year. Some specialty lenders will accept proof of income from your previous job as evidence that you can afford the loan. The idea here is that if your business doesn’t work out, you can always return to a position with a similar salary and make your repayments on time.
If you’ve been self-employed for less than a year and want to apply for a home loan, it’s a good idea to speak to a lending specialist or mortgage broker who can advise you on the process and provide guidance at each step.
There are special options available for self-employed people who cannot provide traditional proof of income. These are known as ‘low doc’ or low documentation loans.
You can apply for a low doc loan if you’ve been employed in the same line of work for several years and have only recently become self-employed. For example, you might be a plumber who has been self-employed for less than a year but worked in the industry for 10 years. In this case, you can be considered for a low doc loan.
When applying for a low doc loan you’ll have to sign a declaration that confirms your income. This may need to be backed up with a letter from your accountant. Your application will then be assessed based on the declared income.
Applying for a low doc loan doesn’t mean that you will be charged a higher interest rate. However, depending on the lender, you may be charged Lenders Mortgage Insurance as a one-off fee. Not all lenders allow low doc loans, so if you choose to go with this route be sure to check that it’s an option before you begin the application process.
Self-employed individuals may find it challenging to apply for a mortgage, but it’s more than possible for you to finance your dream home with a loan. You just have to back your application up with additional documentation that proves your business is stable and you’re able to make your repayments on time.
To make the process easier, a lending specialist can guide you towards finding a lender who is familiar with the nuances of self-employed home loans. Get in touch with our team and we’ll happily match you with a suitable lender and guide you throughout each stage of the home loan process.