If you work for yourself, or fall under the category of ‘self-employed’, applying for a home loan can be quite a challenge even if your income is regular.
But this does not necessarily mean you cannot get approved for a home loan. It just means you might need to put a little bit more effort in to get your home loan approved. If you’re in this situation right now, where you're finding it difficult to qualify for a loan due to being self-employed, here’s some tips and tricks to get your loan application approved.
Lenders are more specific in their requirements when dealing with business owners and sole traders. That’s because historically, these type of borrowers have defaulted more often than pay as you go (PAYG) employees - those paid a regular salary.
When you apply for a self-employed home loan, a lender needs to consider your financial situation and the financial situation of your business
At loans.com.au , we consider someone self-employed when they receive more than 50% of their income, including wages, from a business:
In which they are the sole trader, a partner, director or shareholder; and
Where they have management control of the company.
As someone who is self-employed applying for a loan, your main goal is to prove your income to your lender. You can do this by providing your personal and business income tax returns for two years, and also the profit and loss statements of your business. Lenders want to see consistency in your income.
You can ask a professional such as an accountant or a broker to help you document your personal tax returns and financials. Also, make sure that your income tax returns are lodged with the Australian Taxation Office (ATO).
At loans.com.au, self-employed borrowers need to provide:
The most recent two financial years full personal tax returns with corresponding ATO Tax Assessment notices;
and the most recent two financial years full business tax returns; or full financial statements for the business including balance sheet and profit and loss statements, signed by the borrower’s accountant.
LCA may make exception where a borrower has only 12 months trading in the current business and 2 years in previous PAYG employment with similar occupation or field.
This may be easier said than done, but a healthy amount of deposit can boost your chance of qualifying for a loan. It shows the lender that you’re a lower-risk borrower and that you’re financially disciplined. Generally, putting down 20% or more of the value of the property is ideal. This also gives you the benefit of not having to pay for expensive Lender’s Mortgage Insurance.
Your lender will need to see proof of your deposit. So you will need to prepare a list of your assets. This could mean showing bank statements to confirm your savings or term deposits. At least six months of recent bank statements will be required. Other assets may include any investments like stocks and rental properties. Moreover, if you already have an existing property, you can use your equity when you apply for a loan.
Whether you’re self-employed or an employee, a high credit score will increase your chance of qualifying for a home loan. Remember, your lender will not just run a credit check on you, they will also inspect the credit history of your business, so make sure that your business’s credit score is healthy too.
If you find yourself with bad credit, you can still improve your credit score by sorting out any unpaid debts and making sure that you continue paying your debts on time. You can also check your credit score from your provider to make sure there are no mistakes.
If you have only been self-employed for a few months it will make you a less attractive candidate for a loan. So make sure that you’ve been successfully self-employed for a couple of years.
Looking to finance your house when you’re self-employed may take a little more work and preparation compared to being an employee. But getting your home loan approved is still possible as long as you have your financial documents in order to prove your income.
If you are ready to get started on your application, call our friendly staff or chat online to a lending specialist.