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A Guide to Home Loans when you work for yourself
Being your own boss wasn’t exhilarating enough…now you’ve decided to throw a home loan into the mix. You will often hear people say: “self-employment is risky for home loans” or “It’s harder for self-employed individuals to get a mortgage.” Whilst this may be true in some cases, it certainly doesn’t mean that self-employed borrowers can’t secure financing.
Yes, your financial dynamics are uniquely different and lenders often seem to speak a different language. As entrepreneurs, freelancers, or small business owners, showcasing a stable income and financial stability may present unique challenges. But fear not! Even amid these challenges, securing a home loan is not just a dream, but an achievable reality.
Check out these five fundamentals that can help self-employed borrowers make their dreams of homeownership a reality.
- Organise and Prepare Your Financial Documentation
One of the key steps in securing a home loan is organising and preparing your financial documents. As a self-employed individual, your income might not be as predictable as someone with a regular 9-5 job, but that doesn’t mean you can’t demonstrate financial stability.
Start by keeping clear records of your income, expenses, and any fluctuations in your finances. Ensure your tax returns are up to date, as lenders will scrutinise them to evaluate your income stability. If you maintain comprehensive and precise financial records, you can present a strong case to lenders, showcasing your credibility as a borrower.
This proactive approach to financial management can go a long way in securing your home loan. Better yet, providing detailed and accurate financial information to your mortgage broker makes everyone’s job easier.
- Work with a Knowledgeable Expert
Navigating the home loan process on your own can be a daunting task, especially when you’re self-employed. This is where the help of an experienced and knowledgeable expert can make a significant difference.
It’s not just about finding a professional who can guide you through the loan application process. It’s about partnering with a mortgage broker who understands the unique financial dynamics of self-employment and can help you present your finances in the most positive light to potential lenders.
They have the expertise and experience to find suitable lenders who offer loans that you might not come across on your first Google search. Brokers can also offer you tailored advice, guide you towards the most favourable loan options, and negotiate on your behalf to secure the best possible rates. Working with an expert can simplify the entire process, turning the challenge of securing a home loan into an achievable task.
- Demonstrate Stable Income
Lenders typically evaluate the stability of income when assessing a borrower’s ability to repay a loan. For self-employed individuals, demonstrating stable income can be challenging due to irregular cash flow. However, maintaining consistent revenue streams and documenting income sources can strengthen your loan application. Consider providing financial statements, contracts, and invoices that showcase a steady income pattern over a reasonable period, bolstering your case to lenders.
- Build a Strong Credit Profile
A strong credit profile is important for any borrower, including self-employed individuals. Lenders rely on credit scores to assess risk and determine interest rates. To build a robust credit profile, make timely payments on your existing debts, keep credit utilisation low, and avoid unnecessary credit inquiries. Regularly check your credit report for any inaccuracies and address them promptly. Improving and maintaining a good credit score will increase your chances of securing favourable loan terms.
Remember, every time you apply for a loan through a lender, they will run a credit check. This could negatively impact your credit score, so it’s essential to work with a mortgage broker who can find suitable lenders and reduce the number of credit checks performed. When a mortgage broker runs a credit check, it is considered a soft inquiry and does not affect your credit score.
5. Save for that deposit
Lenders tend to view self-employed borrowers as higher risk, so having a larger deposit can help offset this perceived risk.
Start by setting a savings goal and create a budget that allows you to set aside a consistent amount each month. Consider transferring a set amount into a dedicated savings account when you receive your income to avoid the temptation of using it elsewhere.
Additionally, look for ways to increase your income, such as taking on more work or finding side gigs that can supplement your income. Every little bit helps and could fast-track your savings goal.
It’s also worth exploring potential grants or concessions available for first-time home buyers. In some cases, these can go a long way towards bolstering your deposit and getting you a step closer to homeownership.
Having a sizeable deposit not only increases your chances of loan approval but can also help you secure better loan terms and potentially save on lender’s mortgage insurance. Remember, the more you save, the less you need to borrow, and the less interest you’ll pay in the long run.
Its absolutely possible
Becoming a homeowner as a self-employed borrower may require extra effort and preparation, but it is entirely achievable with the right approach. By organising and preparing your financial documentation, working with a knowledgeable mortgage broker, demonstrating stable income, building a strong credit profile, and saving for a down payment, you can position yourself for success in obtaining a home loan. Remember, there are mortgage options available specifically tailored to suit the needs of self-employed individuals. With determination, discipline, and the support of professionals, your dream of homeownership can become a reality.
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Q1: Can I get a home loan if I’ve only been self-employed for a short period
A: While most lenders prefer borrowers who have been self-employed for at least two years, exceptions can be made if you can demonstrate strong income and financial stability. Some lenders may also consider your previous employment in a similar field.
Q2: What if I have a bad credit history?
A: A bad credit history can make obtaining a home loan more challenging. However, different lenders have different criteria. Some may be willing to overlook credit issues if you can demonstrate strong financial stability and income. Improving your credit score can also increase your chances of securing a loan.
Q3: How can a mortgage broker assist me in securing a home loan?
A: Mortgage brokers have in-depth knowledge of the home loan market and the requirements of different lenders. They can help identify the best lender and suitable loan options, guide you through the loan application process, negotiate on your behalf, and address any issues that may arise.
Q4: What documents do I need to provide as a self-employed borrower?
A: Generally, you’d need to provide the last two years of income tax returns, profit and loss statements, bank statements, and any other documents that demonstrate your income. The specific requirements may vary depending on the lender.
Q5: How much deposit do I need to save for a home loan?
A: This depends on the lender’s requirements and the value of the property you intend to buy. Typically, lenders require a deposit of between 5% and 20% of the property’s value. The larger your deposit, the less you’ll need to borrow, and the smaller your mortgage repayments will be.