You may consider a home loan as just another form of credit, and not expect the application process to be too different just because you’re self-employed. In reality, while there may not be restrictions on the kinds of loan you can apply for, you may have to work harder to prove to lenders that you can repay the home loan. For this reason, you should study all borrowing options available to you before making your choice.
How is a home loan for a self-employed person different from a traditional home loan?
The application process for a traditional home loan usually involves submitting your payslips as proof of employment and income along with bank statements which show that you have the savings for a deposit. The lender will then verify your income and check your credit rating for your loan and credit history. Using your payslips, lenders can easily put a precise number on your earnings and ability to repay the loan. If your home loan application is approved, the lender will let you borrow up to 80% of your home’s value and you may even get a better interest rate.
If you’re self-employed, the first hurdle you are likely to face is that you don’t have payslips as proof of income. This may not be too much of a problem if you’ve been self-employed for more than two years, as lenders often ask for two years’ tax returns from self-employed borrowers.
If you don’t have two years’ tax returns, there is the chance you can submit either a self-certified income statement or a letter from your accountant. Based on the documents you submit the lender may come up with their own estimate of your income to assess your eligibility. They also do this to check for any significant difference in your income from one year to another, which is possible, especially early in your self-employed career.
This can add some uncertainty to your home loan application. To help you through this, you could go over your business financials with an accountant and see how you can prove that you have a regular income with which you can repay your home loan. Ideally, you want to make it easy for the lender to review your application and have confidence in your ability to repay the home loan. It will also help you find out if submitting additional business documents such as financial statements and business activity statements can strengthen your application.
What are the different kinds of housing loans for the self-employed?
Most Aussie lenders offer the traditional ‘full doc’ home loan for self-employed borrowers who can submit documents that include tax returns for the previous two years, business financial statements and bank statements. This is the preferable option, as you can borrow more -- usually up to 80% of your home’s value -- at a better interest rate and pay a lower deposit. You may also avoid buying lenders mortgage insurance (LMI), which helps a lender recover losses they incur if you default on your home loan.
Some lenders, on the other hand, may offer an ‘alt doc’ or ‘low doc’ home loan for those who have been self-employed for only a year or so and can’t submit two years’ tax returns. Instead, they may accept your business activity statements (BAS) and self-certified income statements or an accountant’s letter as proof of income. The trade-off is that you can only borrow up to 60% of your home’s value, which means you need to pay more for the deposit. You’ll probably have a higher interest rate on a low doc home loan as well. You may want to make a low doc home loan last resort and check with your lender if you can switch to a full doc home loan at a later time.