Being your own boss sure has its advantages: the flexibility of setting your own hours, building your own business to represent your values, having someone else fetch you coffee…
But when it comes to home loans, you may have more to prove than the average applicant.
You see, lenders may view you as a little more risky. That’s because, in their eyes, you may not have a steady paycheck to make those all-important repayments.
But being self-employed needn’t stop you from getting your slice of the great Australian dream.
Planning ahead and knowing what lenders generally look for could give you an edge when it comes to mortgage application success.
1. Get your finances in order
As a self-employed applicant, having rock-solid finances is important.
Even if your business is booming, most lenders will see you as more of a risk for defaulting. That’s because self-employed incomes can be less consistent.
Lenders want to know that the likelihood of you making regular repayments is high.
And to mitigate risk, loan options available to you may have a lower loan-to-value ratio (meaning you may need a higher deposit) and/or have a higher interest rate.
So, to prepare to apply, consider getting your finances in check by:
– Building up a healthy credit report (no missed payments or defaults).
– Living expenses that are not excessive, particularly discretionary spending.
– Saving up a healthy deposit (aka genuine savings) and a cash buffer.
– Structuring your activities to support a loan application, which may mean an increased focus on profit.
2. Gather your documents
It’s important to keep your business and personal finance documents up to date, so you’ll be ready to rock and roll.
For verification of income, many lenders require two years worth of lodged business and personal tax returns.
It’s a great idea to tell your accountant in advance that you’re planning on applying for a home loan. That’s because some of the financial wizardry they apply to lower your tax bill might work against your application and lower your borrowing capacity.
On top of running your credit score, some lenders may want statements from loans and credit cards for proof you can make regular repayments.
They may also want to see verification of assets such as any property, savings and investments.
Some lenders may want to see the whole kit and kaboodle when applying for a loan. Some may need less.
And some offer low-doc loans if you don’t have extensive documentation. But they may come with higher interest rates or the need to pay lenders mortgage insurance (or both).
Exactly what documents are required depends on the lender and the type of loan.
3. Choose your lender wisely
This is a critical point, because not all lenders are comfortable providing self-employed loans for the reasons mentioned above. Lenders may advertise that they are ‘open for business’ when it comes to lending to business owners, however some banks out there make servicing self-employed customers their niche and have unique policy which makes getting a loan approved much simpler.
And every time you apply for a home loan your credit history is “pinged”. The more this occurs, the more of a red flag this may pose to lenders.
So targeting lenders that have a track record of approving self-employed loans might be a wise move.
Having a reputable mortgage professional on your side may be helpful here. Which brings us to our next point …
Speak To An Expert
Schedule in a time to discuss your situation with a home loan specialist
4. Get in touch with us today
Just as you’ll want to give your accountant plenty of notice, so too will you want to reach out to a mortgage broker sooner rather than later.
That’s because we can help you work out your borrowing capacity, and provide you with other tips that you can start working on now that may eventually help make your application more attractive to lenders. In some instances a business owner can take easy steps to significantly increase their suitability for certain lenders (for example paying the director a consistent salary for a period of time, rather than taking dividends). Understanding the ins and outs is crucial.
So if you’re self-employed and think you’ll be seeking a home loan in 2024, book in a call today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
