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What you should know about home loan criteria for self-employed borrowers

What you should know about home loan criteria for self-employed borrowers

Your friends and family may have given you a lot of info about applying for home loans, but you aren’t sure how much of it applies to you because you’re self-employed. For instance, are you supposed to create your own payslips, since you’re technically both your employer and your employee?

Irrespective of what you’ve heard, you should do your own research about home loan criteria for self-employed borrowers and get to know your eligibility. You will also want to know what preparation you need to do for a home loan that will suit your needs.

How are self-employed home loan requirements different from traditional home loan requirements?

Whether you’re self-employed or a salaried worker, lenders will try to find out if you can repay the home loan based on an estimate of your current earnings. Lenders offering traditional home loans, or full documentation (full doc) home loans, determine your income from your payslips if you are an employee of a business.

When you’re self-employed, you may find it more difficult to prove that you will continue to have a steady income that will help you repay the loan. For this reason, home loan criteria for self-employed borrowers differ between lenders, especially in terms of the income documents you need to submit. So while you may not need to create your own payslips, you may be asked to show your tax returns or even an income statement.

Documentation requirements can vary between lenders based on how long you’ve been self-employed. You will probably need to submit tax returns for the previous two years, meaning they will expect you to have been self-employed for at least two years.

If you can’t, you may still qualify for a home loan, it may just be a different type that requires alternative documentation. These documents can include a self-verified statement of your income, an accountant’s letter, and Business Activity Statements (BAS). Also, lenders will almost always ask you for bank statements and business financial statements to showcase savings and overall finances.

Is there a calculator that checks home loan for self-employed eligibility?

Finding out if you’re eligible for a home loan depends on more factors than simply the documents you can present. Proving that you have sufficient cash in hand to pay the deposit and will earn enough to repay the loan is a crucial part of checking eligibility. Lenders will also look at your credit history and whether you’ve repaid loans in the past to gauge how reliable you are with repayments. 

When considering applications from self-employed borrowers, some lenders may prefer estimating the income through their own calculations. Especially if there is a significant difference in the income reported on one year’s tax returns compared to the previous year.

Based on these calculations, lenders may decide that your income can’t be verified sufficiently and reduce the acceptable loan-to-value ratio (LVR) of your home loan. This change in LVR would mean you can only borrow up to 60 per cent of your home’s value, and you’d need 40 per cent deposit upfront. The lender may also increase the interest rate on the home loan, possibly upsetting any budgeting plans you had to help repay the loan. In such a scenario, check if you can repay just the interest on the loan first rather than repayments which include the principal and interest.

Lower LVR, higher deposit and higher interest rates are only likely if you apply for an alternative or low documentation home loan. Lenders may be able to verify your income better if you can apply for the traditional full doc home loan, with your income tax returns as proof of income.

Once a lender feels comfortable with your financial situation you can probably borrow up to 80 per cent of the home’s value, with a lower deposit and at a  better interest rate. Suppose a lender recommends that you opt for an alt doc or low doc home loan. In that case, you might consider checking whether you are eligible to apply for a full doc home loan, even if it’s at a later time.

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This article was reviewed by Personal Finance Editor Jodie Humphries before it was published as part of RateCity's Fact Check process.

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