Self-employed borrowers: The challenges and how to overcome them

08th Oct, 2021 | Articles, Self employed

In this article:
Self-employed borrowers face different challenges when trying to get a home loan. Having strategy and understanding your business structure will be a a major advantage. Here's our tips to put your best foot forward

Getting a loan approved when you’re self-employed can be tricky. When you’re working for yourself, it’s hard to establish the same stability as someone who has a regular payslip and other financial obligations. This is especially true if you’ve been in business for less than 12 months or your credit score is not perfect. Having a strategy and understanding your business structure will be a major advantage when applying for any type of loan from an Australian bank. If you prepare and organise yourself, pulling together all the right documents, you will find yourself with a robust loan application.

What are the common problems?

Proof of Income:

Lenders have a legal obligation to ensure that you as a borrower can afford the home-loan repayments you agree to in your loan application. For a salaried employee, this is fairly straight forward, as years of payslips can be used as reliable evidence of their ability service the loan.

For self-employed professionals, often times they lack consistent income or even a solid record of their income over a significant period of time to prove they’re able to afford the loan. So lenders need more evidence.  

Compounding this is the fact that different lenders approach income calculations in completely different ways. Generally lenders require two years of income tax returns, but many also scrutinise your business activity in detail to assess your financial position. 

Commonly, a lender might want to see your:

  • Most recent income visible on income tax returns
  • Lowest income in the past two years
  • Average income earned over the past two years

Some lenders even consider extra superannuation contributions and tax refunds while many don’t. 

With lenders taking varied approaches to assessing your credibility as a borrower, applying for a home loan can be extremely frustrating to deal with by yourself, purely due to the significant amounts of documentation required.

The Industry your work in:

Different lenders will scrutinise self-employed professionals based on their industry. For example, those employed in high-risk industries (like international travel and tourism) may find themselves jumping through more hoops to secure a loan with certain lenders.

The Loan Amount:

Being self-employed without a long history of financials can make it difficult to be approved for a loan that matches your income level. This is particularly so if you’ve seen a recent spike in your business income. If this increase can’t be shown for a minimum of two years, it’s likely many lenders won’t factor this in when assessing your loan amount.

The Income Window:

As mentioned, lenders often assess your income over a two-year window. If you have been self-employed for less than two years or have recently switched to a new industry, you may find it more difficult to get the loan you’re looking for.

Tips to help make the process easier:

1. Low documentation loans

As the name suggests, alternate document loans allow borrowers who lack a clear financial history to apply for loans with less documented evidence in order to secure your loan. Often times these are used by those who can’t provide consistent financial statements and tax returns. Instead, things like bank statements and declarations from your accountant will be used.

It’s not all roses and sunshine though. Alt-doc loans often come with a higher interest rate and a lower loan amount overall so don’t immediately jump to this option. With expertise and preparation, you may still qualify for a regular home loan.

2. Prove you can save

If you know you’ll be applying for a home loan, plan ahead and start saving. Evidence of increased savings proves to a lender that you can control your expenses and will be better placed to meet your repayment obligations if approved.

3. Organise you tax returns

This is critical. Ensure your tax assessments are lodged and paid. It’s one of the critical factors considered by lenders when considering loan applications. If you need to get your tax returns up to date, start now, because you’ll be able to show to the lender your most recent income history.

4. Understand the ins-and-outs of your business

There are numerous ways to structure your business in order to minimise your tax obligations when you’re a contractor or small business owner. However, if your taxable income dips too low, lenders may scrutinise your application more closely, as they will question your ability to repay the loan.

This is where strategy and expertise can help you. It may suit your circumstances to consider changing your business structure, even if just for a small period prior to applying for a loan. Talk to your accountant or our experts to see what your options are and to assess whether your current business structure is optimal for the next steps you’re looking to take.

5. Be honest

Lenders, mortgage brokers, accountants…they’re all under legal obligations to verify and scrutinise what you say and the documents you provide for you application. So tell the truth. Misleading experts can find you in hot water or with a loan you simply can’t afford.

If you want to know more about your options as a self-employed borrower, reach out to us today!

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