Getting a home loan as a sole trader: Is it possible?

If you’re a sole trader, the legal responsibility for all aspects of your business lies solely with you, including losses and debts. In this scenario, lenders may offer you a specialised home loan known as a low documentation loan, also called a low doc loan. Since you can’t provide salary slips to verify your income, it is possible to apply for this loan using alternative means of documentation, such as:

• Notice of assessment and tax returns for the last two years
• A 12-month business transaction account statement
• The latest 12 months of Business Activity Statements (BAS). Some lenders might accept six months BAS if you can demonstrate strong financials
• An accountant’s letter supporting your income claim 

If you’re unable to provide all these documents, some lenders may agree to consider your application if you can at least provide tax returns for the last two years or your recent profit and loss statements. 

Sole traders who started their business less than two years back and don’t have tax returns to prove their income are unfortunately viewed as too much of a financial risk by most lenders. However, if you’ve been working in the same industry for many years before starting your business, some lenders may be willing to consider your income from your previous job and accept that you can afford the home loan. This is often done on a case-by-case basis. 

For instance, say you’re a sole trader, operating a plumbing business for less than two years, but you’ve got experience of working in the industry for over seven years. In such a scenario, some lenders may consider your combined experience and work history as enough evidence to approve your application for a sole trader home loan. You may have to prove you’re less of a liability another way though, such as having a large deposit or spouse supporting your application. 

The amount you can borrow varies from lender to lender and also your individual circumstances. If you’ve been self-employed for less than two years, lenders are likely to consider you a higher risk and offer you a lower percentage of the property price as a loan. On the other hand, if you can provide two years of tax returns with notice of assessments, you may be able to borrow up to 80 per cent of the property price or even more if you agree to pay for Lenders Mortgage Insurance. 

The important thing to know is that there’s no fixed way in which every lender is going to treat your home loan application as a sole trader. Some lenders are quite strict when it comes to self-employed borrowers, while others may be more lenient. By understanding the eligibility criteria of various lenders, you can increase your chances of approval and even land a better deal by selecting a lender who’s more likely to treat your mortgage application favourably. The services of a mortgage broker could also prove to be helpful if you’re looking for a sole trader home loan, especially when you’ve less than two years of experience in the field.

Even though low doc loans are similar in structure to traditional loans, the absence of standard documentation to prove the borrower’s income makes these types of loans risky for lenders. To offset their risk, lenders often have tighter eligibility requirements or charge extra for such loans. Some additional costs you may have to bear for a low doc home loan include:

• A larger deposit requirement: Many lenders require 20 per cent of the purchase price as a deposit with a standard home loan, but with a low doc loan, you might have to put up more than 20 per cent.
• A higher interest rate: This could differ from lender to lender and also depends on the kind of supporting documents you’re able to provide.
• Lenders Mortgage Insurance (LMI) premium: LMI is an insurance premium paid by you to the lender when you borrow 80 per cent or more of the property value. But with a low doc loan, LMI may come into play if you’re borrowing more than 60 per cent of the property value.

Even though a low doc home loan is likely to cost you more than a traditional home loan, it’s possible to find a good deal if you can make your application stronger with a good credit score and strong financials for your business. 

A good mortgage broker can help you compare deals from various lenders to find suitable home loan options and even negotiate with a lender to help you get a better deal. They can also help you with the application process, including keeping track of the paperwork, which could be useful when you don’t have the standard home loan documentation available as a self-employed borrower.