You’ve achieved the goal of running your own business. Now we explain how to achieve another important goal – buying a home when you’re self-employed.
If you run your own show, not only have you joined the one in five Australians who are self-employed, you’ve achieved a goal many people only dream of – being your own boss.
However, running your own business shouldn’t get in the way of plans to buy a home. There may be more hoops to jump through, often because lenders may regard self-employment as higher risk. But that doesn’t mean you should give up on the goal of home ownership – far from it!
Here are some key things to know.
Have your financial records up to date
When self-employed borrowers apply for a home loan they are normally assessed just like any other home loan applicant. It all comes down to being home loan ready.
The same lending restrictions are likely to apply in terms of the deposit you need, the amount you can borrow and being able to demonstrate a reliable income to manage your loan repayments. It’s on this latter point – proof of income, where self-employed borrowers may have different requirements.
It’s easy enough for an employee to hand over several recent consecutive pay slips as proof of income. But things are a bit different when you’re self-employed. Expect lenders to ask for your last two years of personal and business tax returns and income tax assessments. That’s because lenders will use your declared taxable income, not gross turnover, to determine your borrowing capacity.
These requirements make good record-keeping essential but could already be happening as part of running your own venture.
In fact, if you’re up to date with all your accounts and tax returns, you may be able to secure home loan pre-approval. Your Aussie Broker can tell you more about how pre-approval could work in your situation.
If there are large variances in your income from year to year they’ll need to be explained. Consistent earnings over two years or an upward trend in earnings are good indicators that your business is ticking along nicely.
What about low doc loans?
As a self-employed person you may have heard of “low doc loans”, where lenders look at a different set of financial measures to assess your application.
The fact is, low doc loans are becoming less common due to responsible lending requirements, which call for your lender to be sure you can comfortably handle your loan repayments.
That said, the low doc route can be helpful for a business that’s fairly new and doesn’t have two years of financials to show.
To be eligible for a low doc home loan, you generally need to:
• Be self-employed in the same industry for at least 12 months
• Hold an Australian Business Number (ABN), and
• Have Business Activity Statements (BAS) for the past year verified by the tax office.
The downside of low doc loans is that not all lenders offer them, and they can come with a much higher interest rate. You may also be asked to stump up a larger deposit than with a traditional home loan.
What if I’ve only just started my business?
If you’ve been self-employed for just a short time, it can be challenging to secure a home loan. However, there can be sound logic behind this.
For a whole variety of reasons – some financial, and some personal – small businesses don’t always make it past the first few years. So while it’s understandable that you want to get into a home of your own sooner, it can make sense to hold out a little longer and see if running your own show is really the right choice for you.
On the plus side, your Aussie Broker can explain what you need to do to put together a strong home loan application when the time is right. So it’s a good idea to speak with Aussie even before you’re ready to apply for a home loan.
For more insights into how to get a home loan when you’re self-employed, talk to your Aussie Broker.
This article was originally published in November 2016.