Running your own business shouldn’t get in the way of plans to buy your first home
When it comes to sorting out your home loan there are always lots of hoops to jump through. So is it any harder to get a home loan if you don’t have an employer paying your salary from month to month?
According to Aussie broker Catherine Dodd, being self-employed isn’t an obstacle when it comes to buying that first home. Her Neutral Bay office handles many enquiries and finance applications for people running their own business.
“Self-employed applicants are really just like any other first home buyer,” says Catherine. “And that means the same lending restrictions apply – the deposit they need, the amount they can borrow and demonstrating a reliable income to make the repayments. So the advice we’re giving to self-employed clients on their borrowing capacity and the type of mortgage they need is very much the same as for other applicants.”
What paperwork will I need?
All home loan applications require a fair amount of paperwork. You need to show all your assets, income and liabilities and that can involve a little housekeeping for your finances. If you’re self-employed, there’s an extra layer of paperwork involved for your business financials.
“Lenders generally want to see the last two years’ tax returns for you and your company plus the latest balance sheet and profit and loss statement,” says Catherine. “And if there are large variances in income from year to year they’ll need to be explained. Consistent earnings over the two years or upward trends are a good indicator that the business is ticking along nicely.
“However, the good news is, there’s a growing number of lenders that will work with the current year’s tax return, which can help maximize your borrowing capacity.”
So if you’re up-to-date with all your accounts and tax returns, you’ll be all set to seek pre-approval for your home loan. If you’re getting your accountant to bring your finances up to date, it may be a good idea to know how much you want to borrow before finalising those figures.
“Speak to your broker ahead of your property search to understand your borrowing capacity and use that information when meeting with your accountant,” says Catherine. “The lender will be using your declared taxable income, not gross turnover, when they look at your borrowing capacity.”
What about low doc loans?
Catherine says low doc loans – where lenders look at a different set of financial measures to assess your application – are becoming less common.
“I’d say only about 1 in 40 applications are for low doc loans,” says Catherine. “In today’s regulatory environment there are tighter lending practices across the board. Even with a low doc application, we always have a responsibility to the lender and customer to show the loan is affordable and meets their goals and objectives.”
Having said that, the low doc route can be helpful for a business that’s fairly new and doesn’t have two years of financials to show.
“In some cases we can work with lenders that will rely on the last 12 month of Business Activity Statements (BAS) along with six months of bank statements for the primary business or personal transaction account,” says Catherine. “But this limits your choice of lenders and they’ll often require a larger deposit on the property.”
Does my application take longer?
If you’ve got the paperwork in order and a business in good shape, the application process should be pretty straightforward.
“Being prepared will help avoid delays in approval when you have found the perfect property,” says Catherine. “With 21 lenders on our panel, we’re dedicated to offering you the right solution for your circumstances, no matter what your employment status is.”
Have you had experience of applying for a mortgage when self-employed? Share your thoughts in the comments below.