The ins and outs of home loans for the self-employed
There’s been a lot of talk over the past few years about how tough the banks have become when it comes to assessing home loan applications.
And it’s true. The house price correction, pressure from the financial regulators and the revelations from the banking royal commission have all combined to make lenders much more prudent about who they approve for mortgages.
This is a good thing and puts a sense of security and stability back into banking. But for would-be borrowers who are self-employed, it can make life a little difficult.
So, what’s involved in getting a mortgage application across the line when you’re your own boss?
Is it a tricky situation?
There’s a bit of a fear in the minds of self-employed borrowers. They believe they’re seen as pariahs by lenders – customers to steer clear of because of a greater sense of risk.
However, the truth of the matter is that self-employed borrowers are assessed in the same way as every other type of would-be mortgage holder.
There’s no black mark against your name before you’re even submitted your paperwork. It’s not some big, scary unknown.
After all, one in five Aussies run their own businesses. Banks know that and appreciate it.
That said, though, getting all of your ducks in a row can be a little bit trickier than if you were employed by someone else.
OK, well I admit, it’s a little different but nothing to stop you. Say someone who works for wages only has to provide 2 payslips with most lenders, whereas someone who is self-employed will need to have been trading for at least 2 years and be able to provide those last 2 years in trading results.
What do you mean by “trading results”?
Well, depending on whether you are a sole trader, a company or a trust, then you’ll need to provide your own personal tax return as well as a profit & loss statement and a balance sheet that shows yours, or the businesses assets and liabilities.
Being home loan ready
The amount you’re eligible to borrow comes down to demonstrating your ability to repay the mortgage now and in the future. It’s about having an income that’s able to service your home loan repayments.
This is no different to if you were someone else’s employee. But in that situation, you’re asked to provide a couple of pay slips. As a self-employed borrower, there’s more paperwork required.
Expect the bank to want two years of financials. Financials are another terms for “trading results” as we mentioned earlier. This is both personal and business tax returns and income assessments, and the books of your operation. Gross turnover won’t cut it either. They’ll want to see your declared taxable income from your business. Sure, you may be questioned about sales growth or decline but it’s the bottom line that counts!
This will require you to have kept good, clean and clear records. These are things your accountant can give you and that an adviser like Intuitive Finance can put in a shape that lenders demand.
There’s a process when it comes to mortgage applications for self-employed candidates. It’s why utilising the services of an expert in this area is important. You want to have the best advantage, so the application is smooth sailing and your property purchase isn’t delayed – or worse, derailed.
Contrary to common myth, you aren’t usually charged more or hit with higher interest for being self-employed. And why should you be penalised for running your own business? It’s just that there are a few more hoops to jump through.
In fact, sometimes it’s quite the contrary.
Intuitive Finance is a specialist in mortgage applications for self-employed borrowers. It’s what we do, and we do it well.
Are low doc loans an option?
For some people, a Low Doc or Lo Doc loan may present the “path of least resistance”.
Some clients who have multiple entities, complex structures or even earn very different types of income, a Lo Doc loan may be better for them in this case.
These types of loans, though, are becoming increasingly uncommon in the lending marketplace due to a greater focus on responsible lending, but that’s not to say that in some situations, they aren’t a viable alternative.
But beware, a Lo Doc loan can come with higher interest rates and can have quite expensive fees attached to them, so anyone considering this option needs to understand the cause and effect of this option.
Finding the best solution
In most instances however, we will work through a clients’ situation in order to secure the best outcome for them.
We pride ourselves on working with a qualified borrower to not just get them a loan, but to secure them the best arrangement for their property purchase.
We work with a would-be borrower and their accountant to build a case for a lender that results in the best possible outcome.
It’s not just the easiest approach, but the right approach that we focus on.
And with a bit of work and planning, it is very normal that in most instances we can secure our self-employed clients a great outcome.
So if you are self-employed and want a specialist in this area to help you, why not call us now, we’d love to be able to assist you.
Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!
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.