Is it difficult for self-employed people to take out a home loan? Do lenders view them differently than regular borrowers who work for others? Let us find out whether it is tough to get a self-employed home loan or not.
Usually, self-employed home loans are designed for borrowers such as small business owners, contractors, entrepreneurs and freelancers who do not have access to the usual documents (e.g. regular payslips) for a standard home loan.
Lenders view self-employed people differently
Banks and other lenders generally consider self-employed people or business owners as higher-risk borrowers as their income is not consistent. So they add extra layers or do a more detailed assessment of home loan applications from business owners.
If you work for an employer, a lender will look at your current income level (sometimes even if you just recently started a new job) to make a lending decision. However, when you work for yourself, the lender will also assess both you and your business’s financial position for a longer period of time (normally for the past two years).
If you are self-employed or own a business, lenders may view your income as ‘unpredictable,’ putting you at a higher risk of missing repayments. It does not mean that lenders will reject self-employed home loan applications right away, however, the scrutiny will be greater, and the burden of preparing documentation will be heavier.
In saying this, there are many lenders, including big banks, who treat self-employed clients friendlier and more generously. For expert advice on self-employed home loans, you can search mortgage brokers with expertise in the self-employed space on AirBroker.
Full doc home loan vs. Low doc home loan
The difference stems from the level of documentation that can be provided to the lenders. Self-employed home loans commonly fall into two categories: full doc or low doc home loan.
When you can submit all the typically required financial statements, such as two years of personal tax returns (for individuals and for businesses), tax assessment notices and business bank statements, then you can get a regular home loan, often called a Full Doc home loan. Self-employed borrowers can still borrow up to 95% of the purchase price with one or two years’ tax returns depending on lenders.
On the other hand, if there is low documentation than what is required for a regular home loan, then self-employed borrowers can take out a Low Doc home loan.
Also known sometimes as an Alt Doc home loan, it helps people to borrow with less or alternative paperwork and financial documentation. People with self-employment can typically borrow 80% of the property value with little income verification as a low doc loan with some lenders by providing Business Activity Statements (BAS), Business Bank Statements or Accountant Letter only.
How long do I need to be self-employed?
In order to qualify for a self-employed home loan, most lenders require you to be self-employed for two years at a minimum level. Luckily, a few of the banks (including big banks) even consider those who have been self-employed for only one and half years. And some smaller non-bank lenders may even have a more flexible policy under low doc space for how long a customer needs to be self-employed, with a minimum of one day ABN.
Some banks may approve loans for self-employed people who have been in the same area of work for some time and have at least one year’s financials for the new business, especially for professionals like IT specialists and medical professionals. A few lenders may accept six months of payslips and an Accountant Letter from your accountant instead of tax returns and financials to verify the company director’s income.
What to prepare when applying for a self-employed home loan
Many documents and information are universally needed no matter what type of loans are applied, including identification, employment history, living history, liability statements, saving statements, etc. However, the following are specifically needed for self-employed home loans:
- ABN (Australian Business Number)/GST: You must already have a current and valid ABN. ABN that has been GST registered will be more favourable in most cases, especially considering GST registration is a must for businesses with turnover over $75,000 a year.
- Individual Tax Return: Accountant prepared or self prepared individual tax returns for the last two years (in some cases, within the last year only) will be needed as a key document to verify self-employed clients’ personal income.
- Notice of Assessment: Each financial year, after an individual tax return is lodged with ATO, a final assessment notice will be given by the tax office, and it will be used for the loan application to verify personal income.
- Business Financial Report/Statement: Depending on the type of the business, a company/partnership/trust financial report/statement is needed to verify business income and profit. Normally banks will need accountant prepared financial reports including business Balance Sheets and Profit and Loss Statements.
- Business Tax Return: Associated with the business financial report, a Company/Partnership/Trust Tax Return is needed to cross verify business income for the past financial years.
- BAS (Business Activity Statements): BAS for the previous 6 to 12 months are quite often required by lenders. And most of the time, lenders will ask for the BAS generated from the client’s business ATO (Australian Taxation Office) portal.
- Business Bank Statements: It is not uncommon that lenders may ask for 1 to 6 months’ business bank statements to verify the business’ current business activities.
- Accountant Letter: In certain circumstances, especially in a Low Doc application, an accountant letter is often used as key income documentation for the application. However, in full doc applications, accountant letters may also be used to clarify certain things, including a business’ current running status, explanation of certain business events (e.g. strike-off actions) and business structure changes (e.g. major directorship and shareholding changes).
Even though all the above documents may be asked for in a Self-employed Home Loan application, not all the banks or lenders will require all these. Some banks will only ask for limited documents and put less burden of proof on borrowers to verify their self-employed incomes. Search AirBroker for mortgage brokers who are specialised in self-employed home loan applications.
What is a Low Doc home loan?
A low-doc home loan allows borrowers to obtain a mortgage with less documentation than is required for a typical home loan.
This type of loan is best suited to self-employed individuals because they do not have access to the same financial and tax information that an employee would. A low doc home loan does not follow the same guidelines as a normal home loan when it comes to proving one’s income.
A few reasons that lenders and non-lenders promote low doc home loans so heavily are:
- Low doc loans have a higher interest rate charged by lenders
- It is less expensive and quicker for a bank to complete a low-doc loan
Typically, low doc home loans have higher interest rates than full doc loans, and quite often have risk fees or higher application fees. In terms of maximum borrowing percentage, the Loan to Value Ratio (LVR) is typically capped at 85%. The maximum loan amount is usually capped at $1.5m while some lenders can push this to $2m with a lower LVR.
What things to look for in a low doc loan?
There are more restrictions on low doc home loans compared to standard home loans, as they are a higher risk for financial institutions. Not all lenders offer low doc loan products, so we need to choose the right lender for low doc solutions.
A few prominent issues to look out for in low doc products are:
- Deposit: The maximum amount you can borrow on a low doc home loan is 85% of the property value, for most of the lenders.
- Interest rates: Low doc loan products may require the borrowers to pay a higher interest rate compared to people with full documentation.
- LMI/Risk Fees: Borrowers who borrow more than 60% (some at 70% or even 80%) of the purchase price are frequently compelled to pay LMI (Lenders Mortgage Insurance) or Risk Fees. This means that a bigger deposit will be required to avoid paying LMI in a low doc home loan.
- Fewer options: Not every lender provides self-employed home loans and many shy away from giving low doc home loans, e.g. all the big four banks. It results in fewer alternatives to choose from and low negotiation power in terms of finding a lower interest rate.
Mistakes Banks make while calculating self-employed income
There are some common errors bank staff make when calculating the income for self-employed borrowers. The most common mistakes are:
- Lack of understanding: Complex trust structures involving several companies and trusts are frequently handled by bank personnel who lack the experience to grasp what is happening with your income or if you are receiving income protection payments.
- Double-dipping: This is when a lender considers a cost twice (for example, forgetting to add back interest on loans) or takes an income into account twice (example, Net Profit before tax and approves a dividend given to a director) while calculating the borrower’s income and expense.
- Delays: This is not technically an error because it’s done on purpose. If your loan application is complex and demanding, bank employees may prolong or deliberately take more time processing your mortgage application.
- Add back company car: If you own a car that you use for both professional and personal purposes, you have most likely deducted many of the expenses associated with it. Lenders do not take this into account, but they will frequently add an extra $3,000 to $6,000 in income to compensate.
What are the pros and cons of self-employed home loans
Benefits
- Getting approval: If you are self-employed or a business owner, a low-doc home loan can give you the option to buy a home even if you have been turned down for other regular home loans. Self-employed home loans or low doc home loans could still be your gateway towards achieving your dream to own a home in case of low-income verification.
- Switch to a full doc loan: After 2-3 years, many banks will consider converting your loan to a regular home loan when you are able to provide sufficient income and financial paperwork. This may mean that you will be able to obtain a lower interest rate when switching to a full doc home loan.
Drawbacks
- Higher interest rates: Some lenders will charge higher interest rates since they consider self-employed house loan borrowers to be riskier owing to the inconsistency of income associated with self-employment.
- Larger deposit required: Because most lenders require a lower LVR (Loan to Value Ratio) in a low doc mortgage, self-employed applicants may be required to have a larger deposit than a standard home loan borrower.
- Lenders Mortgage Insurance: While most house loans are subject to LMI, some self-employed loans, particularly low-doc home loans, are more susceptible. Usually, LMI is an additional lender charge for borrowers who have less than a 20% deposit in a regular mortgage. However, some lenders may need a minimum 40% deposit for a low-doc home loan to avoid LMI.
- Limited number of lenders: Not every bank or financial institution offers a self-employed home loan, so you may not have as many options or bargaining power when it comes to getting a lower interest rate. Because of these factors, obtaining approval for a self-employed house loan may be more challenging than obtaining approval for a typical home loan.
Our home loan specialists on AirBroker can help you determine which lenders provide self-employed home loans.
Get a Mortgage Broker for self-employed home loans
Being self-employed should not hold you back from buying a home. Many mortgage brokers are very specialised in the self-employed space, especially those who have an accounting background. At AirBroker, you can search for brokers who have expertise in self-employed home loans.
We believe it is the mortgage broker’s job to guide you through the maze of documentation and assist you in determining what paperwork is required to maximise your chances of approval. Brokers can also help you identify the best home loan for your circumstances – even if you are self-employed.
Understand your situation
Our brokers at AirBroker are experienced mortgage brokers and have expertise in dealing with self-employed home loans. They work closely together with the customers to really understand businesses and properly assess them.
Our mortgage brokers know the importance of providing unique solutions for each client and always work towards achieving this goal.
Help get the right deal for you
Applying for a home loan as a self-employed person is all about having the right paperwork and choosing the right home loan options for your specific situation.
We have access to a wide range of lenders and non-lenders, and we specialise in finding the lender that will view self-employed borrowers’ documents favourably. So, we can help you find the right home loan deal that best suits your circumstance and requirement.
Improve your future prospects
Brokers at AirBroker understand the house loan process for self-employed persons. They know what requirements you must meet and whether you can apply right now or need to wait for some time before applying for a mortgage.
It may prevent you from recurrent rejected applications, which can have a negative influence on your credit score and on your prospects of getting a home loan.
Provide you with reliable support
Our brokers are highly trained professionals having superior knowledge in terms of paperwork required for self-employed borrowers. They will guide you on what documents are required and what is not, maximising your chances of approval for a home loan.
They will check and communicate with the bank regularly to ensure that the entire process, from application to settlement goes smoothly.
If you are thinking of using a mortgage broker but have not been able to find a good one yet, you can go through our page How to find a good mortgage broker for help. With our maturity, experience in the mortgage industry and professionalism, you can trust us in providing a tailored solution for your situation.
