Any lender willing to offer you a home loan needs to know that they’re getting their money back. As a self-employed individual, your home loan qualifications are all about proving that you have the means to repay your loan.
If your credit history shows that you have taken loans in the past and successfully repaid them. In that case, lenders find it slightly easier to loan you the sum you need to buy your home. Also, evidence of your success as a self-employed worker, over a reasonable amount of time, can be a critical factor in ensuring you qualify for a home loan.
What do I need to know, as someone recently self-employed, about home loan qualifications?
Those who’ve only recently become self-employed may find applying for a home loan similar to a hurdle race. Lenders may think you’ll find it tough to stay self-employed for long, which can affect your ability to repay the loan.
They’ll probably want to know if you’ve worked in the same business before, either as a full-time employee or as a contractor basis, and the level of experience you’ve gained. This way, they can gauge your chances of lining up an alternative source of income in case self-employment doesn’t work out for any reason.
This means you need to make your case for a home loan either using the documents required by lenders or by providing sufficient alternative documentation. By doing so, you can simplify the process of checking how much you’re likely to earn and give lenders more reason to trust you as a borrower.
If the lender can’t confirm your earnings, you may only be eligible for a smaller loan, at a higher interest rate. Look into what options the lender offers, both in terms of the type of home loans you can apply for as well as the documents required for your home loan application.
Qualifying for a home loan if you have been self-employed for at least two years
Those who have been self-employed for two years may be able to apply for a traditional home loan, typically called full documentation or full doc home loans. The usual requirements for full doc loans include two years of tax returns, including notices of assessment, financial statements, and bank statements. Once you submit these with your application, the lender will review all documentation to come up with an estimate for your income. This can be necessary if your income has increased sharply from year to year. Some lenders will simply consider the highest income figure, while others may take the average.
Your financial statements can tell the lender if you’re doing well as a self-employed worker, with a positive business outlook. And your bank statements can help prove that you have the savings for the down payment. The lender will also check your credit rating, which will highlight any past history of repayments. If your full doc home loan application is approved, you may be eligible to borrow as much as 80 per cent of the value of your home with a 20 per cent deposit upfront.
Qualifying for a home loan if you have been self-employed for at least one year
If you’ve been self-employed for less than two years, lenders may recommend that you apply for alternative documentation or a low documentation home loan. One year’s financial statements may suffice for this type of loan, and lenders may accept a self-verified income statement from you along with a few months’ bank statements. However, the lender may ask you if you have prior work experience in the same line of business.
If you qualify for an alt doc home loan, you can usually only borrow about 60 per cent of the value of your home. Lenders will probably ask you to buy lenders mortgage insurance (LMI) if you want to borrow more than 60 per cent. Again, you may not get the preferred interest rate, and you may need to reexamine your financial situation before agreeing to this kind of loan.