You will likely need to provide proof of income for the last two years. If you have been self-employed for those two years, that may take the form of:
- Personal tax returns for the last two years
- Business tax returns for the last two years and business bank statements
- Financial documentation from the last two years (these can include profit and loss statements as well as a letter from your accountant)
- ABN and GST registration information
If you have been self-employed for less than two years you may need to provide additional information about your previous employment. This may include:
- PAYG statements
- Payslips
- Letters of reference from your previous employer
Each lender will have its own specific requirements which may differ slightly from the above, but this is a good place to start. To be eligible for a mortgage, you need to prove to a lender you are financially stable, have consistent income, have the potential for business growth and have a long-term trend for earning.
Many lenders are trained largely toward traditional employment, which is why it can make the process a lot easier to engage a broker, but if you are self-employed and considering purchasing a home in the next few years it’s important to keep good financial records to make it easier to satisfy eligibility requirements when the time comes.
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 make loan repayments 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 you cannot satisfy the requirements for a loan with your existing documentation, you may still be eligible for alt doc, low doc or no doc loan options.
Non-bank lenders may be the only option for some self-employed individuals, as they are often more flexible than banks or other lenders.
An accountant or broker can be your best friend in the process of preparing your financial documentation for a home loan application. If your income isn’t in the position that it should be, your accountant or broker can look at any large expenditures and see if there’s the option for add backs.
What is an “add back”?
Your taxable income may not reflect your actual income, or the first year or two as a self-employed individual may include some expenditure that won’t be ongoing. An accountant or broker can look at your returns and identify any expenses that you have incurred which have reduced your taxable income but aren’t ongoing such as:
- Additional payments into your superannuation
- One-off expenses such as set up costs for your business
- Assets that can be written off
- Expenses on an investment, such as rental property expenses
