While the self-employed may enjoy the wonderful freedom of being their own boss, they might find it that bit harder to qualify for a home loan. If you’re self-employed and thinking of applying for a home loan, here’s a helpful guide detailing everything you need to know and how you can get approved.
While there is no specific type of loan called a ‘self-employed home loan’, there are a number of home loan options available that are more suited to the self-employed.
In certain situations these home loans require a lot less documentation than a standard home loan and are specifically designed for borrowers such as small business owners, contractors, and freelancers who do not have access to the usual documents required for a home loan.
A low documentation ‘low doc’ loan is designed for borrowers who are unable to provide all of the normal paperwork required for a standard home loan application such as lodged tax returns or financial statements.
As such a low doc loan includes an element of self-verification to confirm a client’s income details.
Essentially, the Borrower signs a declaration outlining their earnings and - rather than lodged tax returns/financials - provide supplemental documents such as BAS, Bank statements or Accountant’s letter to validate the income used.
Read our ultimate guide to low doc home loans.
This type of loan is best suited to those who are self-employed since they don’t have access to the same financial and taxation information that a person who is employed would have access to, this type of home loan does not have the same rules as a standard home loan when it comes to completing paperwork.
Though you may not have the same documents as a standard borrower, you will still need to provide some information to verify your income. When you’re self-employed, the documents you will need to supply in order to get approved for a home loan will typically include:
ABN: Have an existing ABN (Australian Business Number) and/or Certificate of Incorporation.
A borrower’s income declaration: Provide a signed document verifying your income since lenders require proof that you can afford the repayments.
Business activity statements: Provide BAS (Business Activity Statements) from the last 6 to 12 months. These must be verified by the ATO.
Business and personal transaction statements: Provide at least 6 months worth.
Review your self-employment rights: if you’re a contractor or sub-contractor, some lenders might consider you an employee.
Have a significant deposit: the maximum amount you can borrow on a Low Doc Home Loan is 80% of the property value.
GST registration: Confirmation that you have been registered for GST should you meet the minimum turnover levels.
This last point is crucial. You can register for GST at any time, but it is essential that you register if your business is expected to have a turnover of $75,000 or more per annum.
Furthermore, lenders are looking for different ways to confirm your income, so the more details you provide, the better.
Just like any standard home loan, self-employed home loans come with their own set of restrictions and conditions. These vary from lender to lender so if you’re unsure, speak to a Lendi Home Loan Specialist.
Let’s look at some of these requirements in more detail:
Income: Depending on the lender, you might only have to provide an income declaration. These could include your tax returns, BAS statements as well as profit and loss details. The more information you can provide, the better.
Assets: Since you won’t have access to the same documentation that a standard borrower would, lenders may want to see what types of equity and assets you have. This could mean showing bank statements to confirm savings and other investments you might have.
Credit history: You might need to provide the past three months worth of statements for your business credit cards, transaction accounts plus invoices issued and received. The lender will want to see what your cash flow is like and how you handle all of your financial commitments as a self-employed person.
Extra criteria you need to be aware of includes:
Low Doc options can require the borrower to pay a higher interest rate, compared to someone with full documentation. Check online comparison rates or speak to a Home Loan Specialist for advice.
Lenders require significantly lower LVR in low doc home loans. Borrowers will often be required to pay LMI if they’re borrowing more than 60% of the property value. This means you’ll need a larger deposit to avoid paying LMI.
Package discounts are generally not available for self-employed home loans.
If you have less than 2 year’s worth of accounts and tax returns you may still qualify for a self-employed home loan. Speak to a Lendi Home Loan Specialist today to discuss your options.
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You may access a self-employed home loan if you do not qualify for a standard home loan. You might also qualify for this type of loan if you are a self-funded investor, a company or trust, as the low documentation requirements reduce the amount of paperwork involved, making it an attractive option.
The key to accessing a low-document home loan is that you must be able to provide proof of income. In many instances, this will mean providing two years’ worth of business statements.
If you have been operating for less than 2 years, speak to a Lendi Home Loan Specialist for expert advice specific to your situation.
Getting approved: If you’re self-employed, a low doc home loan can provide you with the opportunity to purchase your home when you may have been declined for other standard home loans.
Switch to full doc: A lot of lenders will consider converting your loan to a standard loan after 2-3 years have passed. This can mean you’ll be able to access a better interest rate.
Higher interest rates: Some lenders will charge higher interest rates since they view self-employed home loan applicants to be riskier due to the unstable income associated with self-employment.
Larger deposit required: You may be required to have a larger deposit than a full-doc borrower because most lenders require lower LVR.
LMI: While most home loans can incur LMI, some self-employed loans, especially low doc home loans, can incur them more easily. LMI is an additional lender charge borrowers with less than a 20% deposit. For a low doc home loan, some lenders can require a minimum 40% deposit to avoid LMI.
Limited number of lenders: Not every bank or financial institution provides a self-employed home loan product, which means that you may not have as much choice or negotiation power when it comes to finding a lower interest rate. A Home Loan Specialist can advise you on which lenders offer self-employed home loans. Because of these reasons, it can be more difficult to get approved for a self-employed home loan than a standard home loan. For expert advice specific to your situation, speak to a Lendi Home Loan Specialist today.
There are a number of Australian lenders who offer home loans to self-employed borrowers, however their qualifying criteria varies from lender to lender. To find a home loan for your specific circumstances, speak to a Lendi Home Loan Specialist. They can compare a number of major Australian lenders as well as non-bank lenders, to find the right one for your situation.
Speak to a Lendi Home Loan Specialist today for free expert advice.