How to Apply for a Home Loan if You’re Self-Employed

Securing a home loan can feel like a daunting task, especially if you’re self-employed and navigating the added complexities of proving your income. But don’t worry—with the right preparation and knowledge, you can make the process smoother and increase your chances of approval. Here’s a guide tailored for Australian self-employed borrowers to better understand how to qualify, what to expect, and how to prepare.

Who Is Considered Self-Employed?

Self-employment can take many forms, and lenders often classify individuals under this umbrella if they meet one or more of the following criteria:

• You run your own business or operate as a sole trader.
• You are part of a business partnership.
• You’re a freelancer, contractor, or tradesperson who determines your own work hours and income.
• You’re a business owner with direct control over operations and financial outcomes.

If you rely on non-salaried income, there’s a good chance you’ll be considered self-employed for a home loan, which impacts how lenders assess your application.

Why Is the Process Different for Self-Employed Borrowers?

Lenders view self-employed borrowers as higher risk compared to salaried applicants. This is primarily because:

1. Income Variability: Self-employed income can be less predictable, with fluctuations based on market conditions, seasonality, or business performance.
2. Complex Financial Profiles: You might have multiple income streams or tax deductions, which can make your taxable income appear lower.
3. Need for More Documentation: There’s an emphasis on presenting a clear picture of your financial stability and ability to repay the loan.

The key is to show the lender that despite these complexities, you’re a reliable borrower capable of meeting loan obligations.

Documents You’ll Need

Preparation is everything when applying for a home loan as a self-employed individual. Here’s a checklist to help you get organised:

For Sole Traders:

• Personal tax returns for the past two years.
• ATO Notice of Assessments from recent tax submissions.
• Profit-and-loss statements for your business.

Additional Documents:

• Business Activity Statements (BAS) for the past year.
• Your Australian Business Number (ABN) and proof of GST registration (if applicable).
• Credit history and statements for existing debts (credit cards, car loans, etc.).

Having accurate, up-to-date records is essential to demonstrate financial stability. 

What does the application process look like?

Applying for a home loan as a self-employed borrower typically involves these steps:

1. Loan Pre-Approval
    Start by checking your borrowing capacity with a lender or broker. This process helps you identify what loan size works for you based on your income, assets, and credit profile.
2. Assessment of Financials
    Lenders will closely review your income history, profit trends, and financial statements. If your income fluctuates year-to-year, they may take an average or consider the lower figure.
3. Comparing Loan Products
    When it comes to unique circumstances, expert guidance can make a distinct difference. Go beyond the headline loan products you typically see and search for products that match your unique financial situation. For instance, some lenders offer specialised loans for self-employed individuals, which may allow for alternative income verification methods.
4. Lender Mortgage Insurance (LMI)
    If your deposit is below 20% of the property value, you’ll likely need LMI. Be prepared to either save a larger deposit or factor in the cost of this insurance.
5. Approval and Settlement
    Once your application is approved, you’ll move toward settlement, where the funds for your property purchase are officially released.

Tips for a Seamless Application

Applying for a self-employed home loan doesn’t have to be overwhelming. Here are some strategies to improve your chances of success:

1. Keep Business and Personal Finances Separate

Maintaining separate accounts for business and personal expenses ensures clean records, which makes it easier to verify your finances during the application process.

2. Ensure Consistency in Documents

Lenders will scrutinise document consistency. Ensure your ATO statements, tax returns, and bank statements align to avoid red flags during assessment.

4. Consider a Mortgage Broker

Specialist guidance can be the key to a seamless home loan. Working with a broker familiar with self-employed loans can simplify the process. They can guide you to lenders who specialise in servicing borrowers like you, saving you time and effort.

5. Demonstrate Stability

Highlight consistent business performance or growth over at least two years. Lenders appreciate stability and evidence of reliable income streams.

Special Consideration for Low-Doc Loans

If your tax returns are not up to date, there are still options, such as alternative document (alt doc) loans designed for borrowers who don’t fit the characteristics of a ‘typical’ borrower. These options often require bank statements, BAS statements, or an accountant’s declaration. However, they can require a larger deposit and may carry higher interest rates.

Are Low-Doc Loans Right for You?

• Only consider low-doc loans if traditional options aren’t accessible.
• Ensure you meet eligibility criteria, such as having an established business and proof of consistent income over time.

Applying for a home loan as a self-employed borrower can seem challenging, but being proactive and organised makes all the difference.

Remember, the path to homeownership as a self-employed individual may be ‘different’ but the right guidance and support pays dividends.