Mortgage Success for the Self-Employed: Tips and Strategies
Obtaining self-employed mortgage approval can be tricky. Why? Because a self-employed person can’t just hand over a couple of months’ worth of payslips as evidence of a regular salary. As a result, mortgage options for self-employed individuals used to involve a lot more stress and a lot more paperwork. However, that was the old days.
If you’re self-employed and in the market for a home loan, then there’s good news: it doesn’t have to be that hard any more. Qualifying for a mortgage when self-employed has gotten a lot easier.
A Growing Demand for Mortgage Options for Self-Employed Individuals
According to the latest statistics, self-employment accounts for 16.6% of the Australian workforce. That’s around 2.2 million Australians who are now working for themselves! As the demand for mortgages among self-employed individuals continues to surge, the industry has seen an increasing number of lenders who now offer solutions.
Challenges of Self-Employed Mortgage Approval
- A lack of documentation: A self-employed individual generally can’t provide routine payslips prepared by a third party. Because of this, a lender may ask for several years’ worth of financial statements prepared by an accountant.
- Variable income streams: When you’re self-employed, your income is more likely to fluctuate. Instead of receiving your salary every week, fortnight or month, you’ll get paid once a job is completed. This irregularity can make some lenders question if the borrower will be able to make monthly home loan repayments.
- Business expenses offsetting taxable income: Most businesses will offset their taxable income using authorised business expenses. These deductions are beneficial for the business (because they reduce the amount of tax owed), but they can also make a business seem less profitable (which could be a red flag to a lender).
- Stricter credit requirements: Some lenders will apply stricter credit requirements when it comes to self-employed mortgage approval. This is done in an attempt to offset the “higher risk”, but it has the effect of making things more difficult for self-employed borrowers.
- Proof of long term business viability: Lenders may ask for proof that a self-employed individual’s business is viable for the long term. They may ask a borrower to provide proof of how long they’ve been operating or show contracts for future ongoing work.
Fortunately, these challenges can be successfully overcome thanks to lenders who now offer a range of mortgage options for self-employed individuals.
Mortgage Options for Self-Employed Individuals
One of our top tips for self-employed mortgage approval is to explore all your options with the help of a mortgage broker. This will make it easier to figure out exactly which kind of loan is going to be right for you. In Australia, lenders offer the following mortgage options for self-employed individuals:
- ‘Full Doc’ loans: A full doc loan is a great solution for self-employed borrowers who have been in business for a while and have plenty of documentation to back up their application. Usually offering a competitive interest rate, this kind of loan will require several years of tax returns, financial statements and bank statements (plus a strong credit rating).
- ‘Low Doc’ loans: Low doc loans are specifically designed for people who are self-employed and who don’t have a lot of financial paperwork to back them up. Up-to-date business activity statements (BAS) or a letter from your accountant can often be used to prove your income (instead of full business financials). A low doc loan often requires a bigger deposit and may come with slightly higher interest rates.
- ‘No Doc’ loans: As the name implies, this kind of loan requires minimal or no documentation to prove your income (although you’ll still need to provide proof of ID and other standard loan paperwork). While a no doc loan may make things easier for a self-employed borrower, they come with some pretty strict criteria and, often, higher interest rates (because the lender views it as a higher-risk loan).
- Asset-backed loans: An asset-backed loan could be a good solution for a self-employed borrower who already has some assets that they can offer as security on the loan. However, an asset-backed loan will usually still attract higher interest rates.
- Non-conforming loans: A non-conforming loan can be a simple way of qualifying for a mortgage when self-employed. They’re designed for borrowers with a “non-traditional” financial situation, and they’ll normally come with higher fees and interest rates. This kind of loan can be a good temporary loan option which can later be refinanced once you’ve demonstrated that you’re reliable with repayments.
Fortunately, there are now quite a few lenders in Australia who offer mortgage options for self-employed individuals (so you’ve got a range to pick from). Eligibility and lending criteria will differ between lenders, but a good mortgage broker can compare all the different options available and help you figure out which option is going to be best for you.
Self-Employed Income Documentation for Mortgages
Self-employed income documentation for mortgages will vary depending on which lender you decide to apply with. Besides the usual proof of ID requirements, you’ll probably also need to provide at least some of the following:
- Up-to-date tax returns for the last 2-3 years (business and personal).
- Business Activity Statements (BAS) for the past 1-2 years.
- Profit and Loss Statements for the current financial year, plus 2-3 years prior.
- Bank statements for the past 3-6 months (both personal and business).
- Business financial statements (including balance sheets and cash flow statements).
- A letter from your accountant confirming your income and verifying that all financial statements are correct.
If you’re worried you won’t be able to provide all of the above information (for example, if you’ve been self-employed for less than 2 years) then talk with your broker about what your best options will be for self-employed mortgage approval.
Tips for Self-Employed Mortgage Approval
Besides talking to an experienced mortgage broker, what else can you do to improve your chances of qualifying for a mortgage when self-employed? Here are some of our top tips for self-employed mortgage approval:
- Improve your credit score: This is something really simple that can make a lot of difference. Make sure you pay all your bills on time and try to reduce debt.
- Get your paperwork together: It’s easy to get a little behind with things like tax and BAS when you’re self-employed. So, take a bit of time to get on top of all the paperwork. Make sure things are up to date, accurate and filed so they’re easy to find.
- Save for a bigger deposit: The bigger your deposit, the more likely a lender will be to look favourably on your application. Even a slight increase may be enough to get you a lower interest rate or better lending terms.
- Aim for a steady income: Lenders will be happier if you can show you’ve had a steady income over the past few years. Talk to your accountant for advice on how to balance mortgage eligibility vs. tax deductions that will reduce your reported income.
- Hold off on new credit applications: Too many credit applications in a short space of time can hurt your credit score. Try to hold off on applying for a new credit card or other loans in the lead-up to your home loan application.
Think outside the home loan lending box: You might be tempted to go straight to your bank when applying for a home loan. After all, you’ve got a history with them, they’re the ones most likely to lend you money…right? Actually, by going straight to your bank you could be missing out on some much better options. Certain lenders specialise in providing mortgage options for self-employed individuals. By thinking outside the box, you could get yourself a mortgage with a lower interest rate or much better terms.
Self-Employed Mortgage Approval – Work with an Experienced Mortgage Broker
Qualifying for a mortgage when self-employed doesn’t have to be as stressful or as difficult as you think. The key is to get the right advice early on. An experienced mortgage broker can help you successfully dodge potential issues. They’ll be able to compare all of the available loan products, identify which one will be most suitable for your particular situation and smooth out any application roadblocks before they become a real problem.
Are you self-employed and thinking about applying for a home loan? If so, don’t wait until the last minute to get some expert advice. The experienced team at Professional Lending Solutions specialise in providing mortgage options for self-employed individuals. Give us a call today or book a free consultation for a time that suits you.