Home loans for self-employed people

• Self-employed people can get a home loan.
• The loan application and evaluation process is different for self-employed people because of income fluctuations.
• Some self-employed people cannot give all the information lenders ask for, but there are lenders who understand this and are flexible.
• There are home loan options, like low doc home loans, that act as an alternative for self-employed people who have been in business less than two years.

There are many perks to becoming your own boss and becoming self-employed. Then there are the drawbacks. One such disadvantage is the difficulty of qualifying for a home loan while self-employed.

While you can get a home loan as a self-employed person, the process and documentation required can be more complicated for you than for a salaried person. Only some lenders are willing to work with the self-employed. There are ways of overcoming these obstacles and some lenders are flexible in how they assess self employed home loans.

We have done the research on home loans for the self-employed so you don’t have to.

Read on to find out how home loans work for the self-employed, what options you have and how best you can prepare to ensure your loan is approved.

Is the home loan process different for the self-employed?

Yes. This is because self-employed is a very broad term and includes business owners, freelancers, and contractors with a wide range of income levels and earning potential. A lot of lenders are not equipped to handle this variety. That is why some of them come off as being inflexible. But there are many other lenders who are flexible and understand that things work differently when you are self-employed.

Here’s what you need to know if you are self-employed now or plan to be and want to go for a home loan.

• Criteria vary from lender to lender. Criteria for self-employed home loans varies, with some lenders being more flexible and others less so.
• Fluctuations of income can be a sticking point. Income fluctuations you experience as a small business owner, freelancer, or contractor — for example, seasonality — can make your income appear unstable even if it is relatively higher than the Australian average.
• Lenders may ask for security. Lenders want to know you won’t default on loan repayment. In the worst-case scenario, they would want to avoid losses by asking for some assets as security.
• More rigorous home loan application process. You will have to endure more steps than a salaried worker. Having the right paperwork ready will make it less frustrating. Keep in mind that the home loan approval process is stressful for nearly everyone, whether self-employed or not.

Eligibility for the self-employed

Lenders want to know three things to decide if you qualify for a home loan:

• Do you have enough assets to cover the deposit and closing costs of the home?
• Can you service the loan by making regular repayments?
• In case you are unable to repay, how can the lender reduce their loss?

To qualify for a home loan you must:

• Have been self-employed for at least 2 years. Anything less than a year will significantly narrow your options because there are no tax returns lenders can use to verify your income.
• Be able to show a strong employment history. A good relationship with your previous employer may also help you qualify for a loan with some vendors. This is because if you close your business, you will still have good employment prospects.
• Show proof of stable income. Most mortgage providers will want to verify that you have been earning a stable income for two or more years. An income history with stability or a growth trend gives mortgage providers confidence. This is verified through tax returns and other financial documentation.
• Be in a favoured industry. If you are in a niche sector with a promising future, that weighs in your favour. But if people in your sector have defaulted on payments in the past, the lender may be a lot less favourable.

What documentation do I need?

Everyone applying for a home loan, self employed or otherwise, has to produce the following personal and business documentation.

Personal information

• Details of employment, or in your case self-employment.
• Your savings history.
• Your credit score and credit history.
• Details of outstanding loans including car loans, personal loans, previous home loans, and credit card balances.
• A list of high value assets you own, including real estate, motor vehicles, savings accounts, investment accounts, superannuation and savings deposits.

Having original copies of documents such as past payslips, recent bank statements and other documents that confirm your financial situation will speed up the process.

Business information

Lenders will also want to know about the financial position of the business or their self-employment status. As evidence most lenders would ask for additional paperwork including:

• Company tax returns for the last two years.
• Financial statements for the last two years, including profit and loss statements, balance sheets, and, sometimes, cash flow statements.
• Personal tax returns for the last two years.
• Proof of your business / contractor / freelance work including ABN and date, registered business name and business licenses.
• GST registration details.
• Business activity statements (BAS).
• A list of your business assets.
• Additional sources of income, if any.
• Current debts of the business.

Because most self-employed home loan applicants claim a lot of their expenses as business expenses when filing taxes, this can make it appear as if they earn less than they actually do. This may have an adverse effect on your home loan viability and the total home loan amount.

Can you provide all this yourself?

Some home loan providers may ask for all of the above. Many won’t ask you for all those listed items.

If all this seems complicated and time-consuming, you could get a certified public accountant and tax practitioner to put together this information for you.

Note that if you are unable to produce all that information and documents, you may still have options to get a home loan while self-employed.

Home loan options for the self-employed

Lenders offer two main types of home loans to self-employed people:

• Standard home loans (full doc home loans)
• Low document (low doc) home loans

Standard home loans

For standard or ‘full doc’ home loans, the application and approval process is only slightly different for the self-employed compared to everyone else. However, you may need to provide more documents. Lenders also calculate income differently for self-employed home loan applicants.

Standard loans carry a lower interest rate than low doc home loans. These are best if you’ve been running your business for at least 2 years and can show proof of income with tax returns. While each lender uses your tax returns to back-calculate your income, they will have different methods of interpreting it. So your loan approval outcome may vary depending on the lender.

Being in business for a minimum of 2 years will also allow you to borrow an amount equivalent to over 90% of the value of a property. This is beneficial if you’d like to pay a smaller deposit.

Low documentation or ‘low doc’ home loans

Low doc home loans are for those who cannot provide the information that is necessary for a standard home loan. For example, a new business started less than a year ago cannot provide business tax returns to verify incomes. In cases such as these, lenders offering low doc home loans rely on the applicant’s self-verification.

You can use documentation to outline your income sources and expenditures. Low doc loans exclude the “previous years business tax returns” requirement, as well as other documentation your new business may be unable to provide.

Low doc home loan providers favour people who have previous working experience in the same industry as their new business. Lenders know, for instance, that if you go from working as a plumber to running your own plumbing business, your odds of success in business are greater.

Low doc home loans have higher interest rates to compensate for the additional risk your lender is taking. If you qualify and begin paying it off, you can later switch to a standard loan and reduce your interest payments.

A note of warning: Low doc type loans are not regulated by the National Consumer Credit Protection (NCCP) Act, so you need to be careful what you are getting into. But for the recently self-employed and those who have experienced a rough first year of business would find low doc home loans a viable option.

Drawbacks of getting a home loan while self-employed

Here are the major drawbacks:

• Higher home loan interest rates for the self-employed. Lenders charge you more for the risk they are taking due to your unstable income patterns and the higher likelihood of your defaulting on a payment.
• Inflexible requirements and demands you cannot meet. If you apply for a home loan with a bank, be ready to experience stringent requirements and demands you cannot meet. They may also make incorrect calculations based on your tax returns.
• Loans with a lowerLVR, limiting the amount you can borrow compared to the amount you can deposit. You may only qualify for 80% or less of the value of the property, which results in a larger deposit being required.
• You have totake LMI, especially for a low doc home loan. This can add thousands of dollars to the total cost of your loan. To waive LMI, lenders may ask for a large deposit, even up to 40% of your home value.
• Limited options. Only a few lenders offer home loans to the self-employed. Rather than going it alone, consider working with a mortgage broker who takes on home loans for self-employed people like you.

How to qualify for a home loan while being self-employed

If you have a strong financial status, you can take the following steps to streamline the approval process.

• Have a large down payment prepared. This can make you look more attractive as an applicant.
• Have all the documentation ready to make the process move faster. Showing that you have all of your ducks in a row makes a great first impression.
• Pay off as much debt as possible. This improves your cash flow and helps you qualify for a larger loan. Lenders typically calculate the ratio between your income and short term debts to decide how much you could comfortably pay monthly as a mortgage payment.
• Having an emergency fund that is separate from your deposit fund can be a show of good faith that you won’t default on any payments.
• Talk to a mortgage broker. Let them to do the heavy lifting for you. They provide you with free advice and can help you get your paperwork in order. Brokers will also know the best banks and lenders that work with self-employed individuals.

Your home loan options are limited, but not impossible

Home loan options for the self-employed people do exist. Just know that you will need to pay additional fees.

Consider whether you want to just sit tight and wait another year or so for your business to flourish since this may put you in a better position to get your home loan approved.