When you’re self-employed and want to obtain a loan, for example for the purchase of your new home, there are certain restrictions and additional procedures you should be aware of, as compared to the average person who is employed by a company. Unfortunately, even though you may earn more than the average salaried employee, these extra steps will mean more paperwork for you – But the good news is, we’re here, and we’re happy to help.
Get Familiar With The Numbers
Firstly, before even applying for a home loan, make sure you’re familiar with your numbers. Get your accounts in order, and make sure everything checks out properly. If you’re self-employed, you should have sufficient accounting skills to ensure everything is in order – If not, pay someone who knows how to do it. Trust us, it’s worth it.
Lenders always look for consistency in income. As a self-employed person, your income can be theoretically more unstable than that of a salaried employee – As such, lenders are going to want to see a consistent record of income. Generally, this means the last two years of personal tax returns. Just a heads up – If your income fluctuates by a significantly large margin, lenders will always use the lower averages as a baseline to do their calculations.
For example, in the first year, or even first few years of being self-employed, you may see certain massive expenses on account of the acquisition of property and equipment that are essential to your business operations. These can generally be taken into account by the lenders if you make it clear to them that these are one-off expenses that will not be repeated on any regular basis at all.
Whilst there will be expenses that are covered by your business – phone, office allowance for home, motor vehicle running costs that “wage earners” still have to pay – all lenders do not add these types of benefits back.
Types of Loans
Be fully aware of the types of loans different banks offer you – They may have different loans with different conditions, stipulations, and rates. Make sure you do your research well because loans from different banks can give you significantly different rates, which could equate to thousands of dollars indifference over the years.
Low Doc Home Loans are designed specifically for self-employed people that may be lacking certain paperwork such as their most recent financial statements. They also are more personalized in the sense that they ask for other types of evidence in order to meet responsible lending and make sure you can afford to borrow. So may include Business Activity Statements, bank transaction statements for the business and other similar documents which shouldn’t be a problem to produce.
Tips and Tricks
Many people immediately head straight to the bank where they have their current personal savings or company banking account, to seek a loan. Our advice is not to. Your current bank has no strong incentive to offer you a loan as they see you as an existing customer. If you approach a bank that you don’t have an existing customer relationship with, there is a likely a higher chance of obtaining better rates for yourself.
Another thing you can do is understand your business add-backs. Things such as depreciation and non-recurring expenses that can significantly affect your finances, and show them in a much more accurate, and positive light.
Lastly – Never fudge numbers. If you’re unsure about the numbers, hold off on your application and get the numbers right. Wrong numbers may not just give you higher interest rates, they may stop your application completely and if declined could affect your credit score.
Use a professional mortgage adviser to guide you through what documents you need, and how to determine what the income is that you can prove.