Whether you're a first-time buyer or refinancing, applying for a home loan in Australia can be a distinctly different experience if you’re self-employed rather than a salaried professional.
Not only may you need to juggle additional paperwork, you're also perceived as being a "riskier" borrower than self-employed professionals.
However, it's still very much possible for self-employed professionals to get a home loan. Here is everything you need to know to try and make that happen.
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How do I get a home loan when self-employed?
Getting a home loan when self-employed is, put simply, all about reducing your risk to the lender.
When you apply for a home loan, you’ll need to provide a few key things:
- A deposit;
- Proof you can repay the loan amount (borrowing power); and
- Proof of employment.
The latter is what makes getting a home loan when self-employed slightly more challenging, as you have less documentation, fewer 'stable' hours and more irregular cash flow, than a full-time employed borrower.
To try and obtain a home loan when self-employed, you'll want to show a lender through various ways that you're a reliable borrower. You may be able to improve your chances via the following:
- Save a higher deposit. While not guaranteed to get your loan approved, saving a larger deposit will always make a borrower look like a more reliable applicant. It's now recommended that you save at least a 20 per cent deposit, and for self-employed professionals, consider this the bar to start from. You'll also be able to avoid pesky lenders mortgage insurance (LMI) by saving a larger deposit.
- Prove you have connections to full-time employment. Depending on the lender, you may need to prove that you’ve worked for a specific amount of time in your line of business, especially if you have been self-employed for less than a year. Working in a role for at least 12 months looks more favourable on an application. If you've recently left full-time employment to be self-employed, this actually may be an advantage. If the lender feels that you may have a regular job you can go back to in the event you cannot sustain yourself while self-employed, you have a better chance of getting your home loan application approved.
- Have an excellent credit score. Lenders will likely take a close look at your credit history and any record of previous loan repayments to determine whether you pose a higher risk. It's worth keeping in mind that if your home loan application is rejected, it can affect your credit history negatively, and applying again for a loan may become difficult.
- Seek external assistance. To try and reduce your chances of being rejected, and to help support your application, you may consider consulting an accountant or another financial expert to guide you with the process. Further, consider contacting a mortgage broker to find out whether anything can be done to improve your chances of a successful home loan application. Mortgage brokers may be well equipped to make a self-employed home loan application look more favourable to lenders.
What types of home loans for self-employed people do lenders offer?
Based on the documents you can submit, your home loan can be considered either a full-doc or low-doc loan. While one of these may have a lower chance of approval, it may actually be beneficial depending on your circumstances.
- Full Doc Home Loan
If you apply for a full doc home loan, you will usually need to submit your latest income tax returns, business’s financial statements and business financial bank account statements.
Lenders may ask you to provide income tax returns, as well as notice of assessments, for the past two years, while the financial statements can be from the last year, and the bank statements for the recent few months.
You should remember that the home loan documents required for self-employed professionals likely differ from those required by people employed in other businesses. A salaried professional may be able to submit payslips for the past few months as proof of continued employment and taxable income. However, self-employed professionals are usually exposed to a thorough a financial vetting as salaried professionals.
- Alt Doc or Low Doc Home Loan
Ideal for those with low documentation, this type of home loan is an alternative document option offered by some lenders for workers who’ve been self-employed for less than two years.
Some lenders may accept a letter from your accountant certifying that your income is indeed what you claim it to be. Alternatively, they may ask for copies of your Australian Business Number (ABN) and GST registrations for the past year, along with business activity statements (BAS) going back at least six months.
While a low doc home loan may appear simpler and more convenient, you may not be able to borrow as much as you can through a full doc home loan, and may also be charged a higher interest rate. This is because some lenders may view self-employed individuals as at a greater risk of default on their home loan, as your income is less stable than that of a full time employed professional.
If you're applying for a low doc home loan, you may want to check with the lender if you can refinance your alt doc home loan to a full doc home loan at some point. Such a conversion can help you get either a higher loan amount or a more affordable interest rate.
- Regardless of whether you're salaried or self-employed, you can apply for all types of home loans, including fixed-rate mortgages, variable rate home loans, lines of credit and more.
How do I meet home loan eligibility criteria when self-employed?
When applying for a home loan, a lender will need you to meet its home loan eligibility criteria to improve your chances of approval. This typically includes criteria such as proof of identification, income and employment. While lenders have similar home loan criteria for self-employed professionals compared to fully employed professionals, the income documents required can differ in the application process.
One concern for lenders is that a self-employed worker’s income can vary significantly, especially in the first few years of self-employment. The income criteria applied by most lenders involves looking at your tax returns or income statement to find out what is the highest income you can possibly earn. For this reason, lenders may apply different calculations based on the documents you provide.
Some lenders may take your most recent income as the highest, while others may prefer to average your income over the past two years to arrive at an estimate. On the other hand, a lender who feels you pose a greater credit risk may choose to take the lowest amount earned to see if you can still repay the loan if you only earn that much. You should consider asking your accountant to examine your tax returns or income statement to ensure that your earnings are reflected accurately, lessening the chance that lenders don’t underestimate your financial capability and ability to repay the loan.
If the lender cannot verify your income, they may recommend that you choose a low doc home loan option, which will reduce the amount you can borrow or alternatively increase the cost of the home loan, or both. Self-employed professionals with a good credit rating, especially those able to afford a higher deposit, may be able to apply for a regular home loan, perhaps by submitting additional companion documents. In case you don’t meet the income criteria because you’ve been self-employed for less than one year, ask the lender if they’ll accept salary slips from your earlier full-time job.
This is where non bank lenders may be able to help you get your application over the line. Compared to traditional banks, some non bank lenders are specially designed to help self-employed professionals get home loan products.
What to ask yourself before applying for a self-employed home loan
Self-employed and not sure whether you qualify for a home loan? Consider asking yourself these questions:
- How long have you been self-employed?
Ideally, you’ve been self-employed for more than two years and can submit your tax returns, or show that you’ve registered for an ABN and GST for about that long. Alternatively, you’ve only been self-employed for a year or so, but you were previously earning a high salary in the same line of work and may be able to find a similar job again if needed.
- Are you able to certify your income as a self-employed professional?
Self-employment may not always be a golden egg, and sometimes you don’t end up earning as much as you hoped. But that could just be due to teething issues and you may have other ways of proving to lenders what you can earn while self-employed.
Whether you're a sole trader/small business owner or just dipping your toe into freelancing as a hobby, getting an accountant to prepare your financial statements and review your tax returns can be helpful. For instance, you may have made one-time payments, such as setup costs, that make your income seem lower and could be ‘added back’ to reflect your income more accurately.
- Is your work or business documented accurately?
Given that lenders often accept alternate documentation, you may want to review your business documentation from time to time. For instance, Business Activity Statements may also be accepted as part of home loan applications, but preparing them and keeping them up-to-date may need considerable efforts. Similarly, ensuring that your financial statements, especially the profit-and-loss statement, reflects the current state of your business can also be quite a task. You may also need to make sure you keep proof of your ABN and GST registration on hand when applying for a home loan.
- Do you need a home loan or a business loan?
If you're applying for a loan for a residential property you intend to live in or use for investment purposes, then a home loan should still be the best fit for your financial situation. However, if you're actually looking to get commercial real estate, such as a brick and mortar shop front, you may want to consider a business loan instead.
Personal Finance Writer
Alex is a personal finance writer and PR professional at RateCity, and has been writing about finance for over three years. She is passionate about closing the gender pay and superannuation gap, and aims to help young Aussies to overcome their financial apathy and better manage their finances. Alex has been published in numerous print and online outlets, including Money Magazine, Lifehacker Australia, and Business Insider.
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What happens to your mortgage when you die?
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If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.
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Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.