You’ve achieved your dream of owning your own business and now it’s time to move onto another important goal – obtaining a self-employed home loan. Self-employed people don’t always have it easy when they want to get a home loan. Most lenders want to see a stable employment track record.
But these days more and more Australians are working for themselves, either running small businesses or freelancing across various fields and industries. It’s an area of work that women, in particular, have embraced.
Managing your own business shouldn’t get in the way of plans to buy a home. There may be more hurdles to jump over, as lenders may regard self-employment as higher risk. But it certainly doesn’t mean you should give up on the goal of homeownership – in fact far from it!
Keep your financial records up to date
It all comes down to being home loan ready. When borrowers apply for a self-employed home loan, they are normally assessed just like any other home loan applicant.
Big banks will ask that self-employed home loan borrowers provide two full years’ worth of financial statements, including tax returns, profit and loss statements and often the last two or three BAS as well. If you have other income such as investment income, you may also be asked to provide this as well. However, there are low doc lenders available that may only ask for your last three or four BAS and little else.
There are also some lenders that will be happy for you to self-certify your income. This is where you sign a certification that you do earn sufficient income to comfortably afford the repayments on the loan amount you’re applying for. You may be asked to provide your Accountant’s contact information to confirm this.
These requirements make good record-keeping essential but could already be happening as part of running your own venture.
If there are large variances in your income from year to year they’ll need to be explained. Consistent earnings over two years or an upward trend in earnings are good indicators that your business is ticking along nicely.
What about self-employed home loans as a low doc loan?
Anyone can approach their regular bank and enquire about a self-employed home loan as a low-doc loan. However, not all banks or lenders are responsive to these requests. Like all applications, there’s no guarantee your request for credit is going to be accepted. A failed application will show up as an enquiry on your credit history. Lenders see multiple enquiries in a short space of time as a troubling sign.
This is where it’s important to discuss your specific needs with a mortgage broker, preferably one who is experienced in dealing with self-employed home loan borrowers. A good broker will know which lending institutions are most likely to be lenient with self-employed home loans as a low-doc loan and which institutions to steer clear from. They’ll also know which lenders will allow you to self-declare your income and which ones may still want to see limited amounts of paperwork and documentation to verify your income.
Of course, there are still some non-conforming lenders that will allow you to apply for a self-employed home loan as a low-doc loan, even if your ABN has been registered for less than the usual two years. A good mortgage broker will know which lenders can overlook this requirement.
To be eligible for a self-employed home loan as a low-doc loan, you generally need to:
• Be self-employed in the same industry for at least 12 months
• Hold an Australian Business Number (ABN), and
• Have Business Activity Statements (BAS) for the past year verified by the tax office.
Who is classified as self-employed for a Low-Doc Home Loan?
Any self-employed home loan borrower who is unable to qualify for a traditional home loan can be classified as a low-doc borrower; some banks will also classify self-funded investors as low-doc borrowers too. A company or trust will also often consider a low-doc loan over a full-doc loan to reduce the paperwork involved in the loan application. Full-doc loans for a company or trust may require two full years of financial statements and tax returns for the borrowing entity, in addition to two full years of tax returns for the individual as well. In this case, opting for a low-doc mortgage can reduce the red tape involved in the application, but it’s at the cost of a low-doc home loan premium.
Pros and cons of self-employed home loans
As with any mortgage, there are some very definite pros and cons with obtaining a self-employed home loan as a low-doc loan:
Pros:
- Documentation: Obtaining a self-employed home loan as a Low-Doc loan requires significantly less documentation is provided in order to verify sole trader income or business turnover.
- Faster Application Process: As there is a low-documentation requirement, you’ll save time tracking down your financial statements, tax returns, BAS statements and other verification from your accountant. This lets you get your application submitted much faster.
- Convenience: The ability to forego all the mountains of paperwork required to verify a traditional self-employed home loan is very convenient for a busy self-employed person running a business. If you can find a lender willing to accept a self-certification for your income, or maybe just showing your last few BAS, this is much easier than providing mountains of paperwork.
- Convert to Full Doc: Many lenders will allow low-doc borrowers to convert their self-employed home loan over to a full-doc loan after a period of time without asking for financial verification. In most cases, this is after two or three years and only if the loan repayments have been made on time throughout that period. Converting the loan over to full-doc can often mean a slight reduction in interest rate.
Cons
- Lower LVR: Many banks will limit the amount of money you’re able to borrow against the value of the home you’re buying or using as security. Instead of being able to borrow up to 95% of the property value, as a full-doc borrower can, a low-doc borrower is often limited to borrowing 60% of the property value. Some lenders will extend this up to a potential 80%, but may charge LMI or a risk fee for any LVR over 60% which increases your mortgage costs.
- Higher Interest Rate: Many lenders view low doc loans as being riskier than fully verified loans. For this reason, they may charge a slightly higher interest rate as compared to a regular mortgage for a borrower. This is known as a low-doc interest rate premium. There is still the possibility that many lenders can revert the loan over to a full doc loan after a period of time, as long as all the payments have been met.
- Fewer Lender Options: Not every bank or lending institution will accept self-employed home loans from low-doc borrowers. Aside from this, some lenders will still require more documentation than others when trying to verify a low-doc home loan. This limits your options and makes it more difficult to negotiate for better deals on interest rates.
To find out whether you’re eligible for a self-employed home loan today, contact Financial Scope Melbourne on 0466 573 209 or admin@financialscope.com.au
Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.
Clint Thomasson
Clint has over 14 years experience in Financial Services working with major corporates including NAB, AMP, ANZ, and AXA. With a passion for Mortgage Broking, coupled with his outstanding interpersonal skills, Clint’s drive is all about matching your needs with the right financial solution. Whilst many businesses offer Finance Broking services, the difference you’ll find with Clint is his ability to listen, engage, retain knowledge and accurately match your requirements. Not only that, but he’s also a very friendly and genuine person with a great work ethic – you’ll have full confidence that he will deliver in a timely and highly efficient manner, every time.
