Contrary to popular belief, being self-employed doesn’t mean you have to settle for a higher interest rate home loan. If you can substantiate your income, you will be assessed similarly to any other home loan applicant – regardless of whether you’re a sole trader, contractor or small business owner.
When you don’t have documents like tax returns to verify your income, you’re more likely to pay more for a home loan. Low documentation loans are for people who can’t provide tax returns and financial statements. As the lender faces more risk with this type of loan, they’re more likely to have higher interest rates and substantial deposit requirements.
To show lenders that you’re capable of managing your loan repayments, this is what we recommend.
Do your taxes
Keep your taxes up to date as lenders will ask for your last two years of personal and business tax returns and income tax assessments. Lenders are looking for consistent earnings or an increase in profits to demonstrate the viability of your business.
Pay your taxes
Small businesses make up the majority of taxpayers with debt. For this reason, the Australian Taxation Office is now allowed to disclose business tax debt information to registered credit reporting bureaus (subject to certain conditions). This change in reporting means that if you don’t pay your tax, this information may end up in your credit report. Lenders use these reports to make decisions on your creditworthiness.
When you take away monthly expenses from your income, lenders want to see you are left with enough money to service the loan. This calculation is known as serviceability and it helps determine what they will allow you to borrow. Show yourself in the best light by building six months or more of low expenses and high income.
Stick with it
Don’t apply for a loan immediately after becoming self-employed. Lenders may want to know that you’ve worked for yourself for at least two years.
Be organised with record keeping
The level of financial information you need to supply varies between lenders. It usually depends on factors such as the loan type, amount and loan-to-value ratio. The most common documents you’ll need: tax returns, bank statements, GST and ABN registration, loan statements and 100 points of identification.
If you can’t produce your tax returns, you may have to take out a low doc loan at a higher interest rate. Even with a low doc loan, you need to show income confirmation. Business activity statements, bank statements and accountants’ declarations are usually acceptable. You may have to confirm that your business has been GST registered for at least six months.
If your partner has a permanent job, you’re better off applying for a home loan together. Your income stability will come under less scrutiny with a financially stable partner.
Cut your consumer debt such as credit cards or personal loans. Less debt will positively impact your cash flow and may even lift your credit score. It’s useful to develop a financial plan to help keep a close eye on your cash flow.
Know which lender is in your court
Some lenders will consider an application based on individual circumstance. Others prefer their borrowers to tick all the right boxes. Your Yellow Brick Road mortgage broker works with a range of lenders, from mainstream to specialist. We know how to find a lender that is a good fit, and we can advise you how to put together a robust loan application.