How To Buy A Home When You’re Self-Employed
Self-employed borrowers come up against the challenge of not being able to simply present payslips to back up their loan applications. But this need not stop you buying your dream home. Australia’s leading Mortgage brokers Sydney show you how.
Most lenders will ask for your last two years personal tax returns and assessment notices, and, depending on your structure – any company or trust returns for the same period. When I see these I can apply a set of tules like adding back your losses from depreciation and loans being refinanced, and averaging the last two years income to work out the figures the bank will use. TIP: Not all lenders treat this the same way, especially where there are large differences in figures from one year to the next.
Many other lenders offer loans for self-employed borrowers who can’t hand over payslips and employment records. This means that, rather than the usual documentation, you prove your ability to service a loan using bank statements, declarations from your accountant and financial records.
Of course, as with any mortgage application, you must still prove that your income outstrips your spending and you can service the loan. Getting this right is more than presenting a lender with a few quick sums on the back of a napkin; it can take a solid six to 12 months of preparation.
Here are some quick tips:
- reduce debt: pay down credit cards and personal loans, and be sure to lower the credit limits as they are paid down, as lenders assess the total credit available to you as a potential debt level, not just the amount you owe;
- cancel credit cards that you don’t need (this will affect credit scoring);
- speak to a credit adviser about how the structure of your business and your taxable income will impact your ability to borrow;
- do your taxes when you should, and always pay your tax assessments on time;
- save: saving a deposit is obviously important, and showing your ability to live within your means while saving is too. This is key to serviceability – you want to show at least a six-month history of high income and low expenses; and
- go to an MFAA Approved Credit Adviser, rather than a bank. Credit advisers have access to specialist lenders that assess applications on a case-by-case basis and tailor their products to self-employed borrowers and contractors, while bank lenders do not.
Loans to the self-employed do differ from standard loans in a few ways, apart from the application process. Lenders offset the extra risk they are taking when lending to a self-employed borrower or contractor by charging slightly higher interest rates and placing some extra rules on loan-to-value ratios (LVR) and insurance requirements.
Generally, you can expect an interest rate for such a loan to be one to two percentage points higher than for a full-documentation loan.
Most lenders will also restrict the LVR (loan as a percentage of the property value) so it’s even more important to get the right advice from us to get the right lender.
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