It can be extremely difficult to secure a home loan when you are self-employed. You can increase your likelihood of getting that loan with this advice from accounting expert Kym Nitschke.
A salaried employee typically receives an income that’s consistent in amount and frequency. This makes it a fairly easy thing to calculate borrowing power and poses less risk to the lender.
What if you are self-employed?
Lenders are usually more hesitant with self-employed borrowers because of the volatile cash flow and irregular income.
If you are self-employed and seeking a home loan, then you can expect that the process will be more stringent and require extensive documentation.
Hope is on the horizon, however! With adequate planning, it can be done. Get started by considering the following questions and advice.
What to Consider When Applying for a Home Loan
– Do you need business finance, as well?
– How will you reconcile a fluctuating cash flow with timely repayments?
– How much can you afford to borrow?
– What is the maximum Loan-to-Value Ratio (LVR) you can borrow?
– What documentation do you need?
Next, let’s take a look at some ways to make finding a suitable home loan easier.
Seek Expert Advice
An experienced mortgage broker will likely have a good understanding of which lenders are comfortable loaning to self-employed individuals. Such a financial expert has an understanding of what the process entails and what documentation is required.
Particularly if you have large fluctuations in your income from year-to-year, a broker will be instrumental in determining your taxable income and borrowing power. Further, a mortgage broker can give you some insight on the policies of different lenders. For example, some will allow you to add back certain deductions while others will not.
Ensure Your Finances Are Up-to-Date
You can avoid disappointment and improve the flow of the entire process by having all your documentation in order. This will make it easier to calculate your borrowing power and submit your application.
Keep in mind that most lenders will require full business Financials and Tax Returns from the past two years, in addition to personal Tax Returns.
Make sure that all of you Business Activity Statements (BAS) have been lodged and are up-to-date.
Where Is Your Business At?
Most lenders actually require that your Australian Business Number (ABN) is registered for 12-24 months before they will approve a loan application. This means that if you are just starting your business, then now is not a good time to be applying for a home loan. While the requirements vary by lender, there are very few options for those who have been in business for less than 12 months.
Plan Ahead With an Open Mind
Be prepared to demonstrate a strong and lengthy history of consistent saving. This will work out to your advantage as lenders look favourably at good credit history. Get yourself off to a great start by showing that you pay off your debts in a timely manner.
You might also consider a Low Doc Loan. This loan is designed especially for self-employed business owners. The majority of Low Doc Loans have a higher interest rate than standard home loans. Low Doc Loans generally allow only up to 80% of the property value to be lent. A larger deposit may be required to get the deal over the line.
Regardless, you should keep the Low Doc Loan option open to consideration.
Home loans are very case-specific so you can’t expect one solution to work for everyone. Improve your chances by being well-prepared and keeping your options wide open.
Let Nitschke Nancarrow help take the stress out of self-employment finance issues, including securing a loan for your next home. Call our Adelaide office today on (08) 8379 8950 or send me an email.