Expert tips on getting a home loan when you’re self-employed

But don’t lose heart, there’s plenty you can do. Let’s look at what it takes to get a great product.

Lenders are often reluctant to engage with people who work for themselves.

So what can you do to assure the lender of your financial stability? First of all, as a self-employed person applying for a home loan, you’ll need to provide tax returns and letters from your accountant.

Even then, many lenders ask that you’ve worked for yourself successfully for at least two years. In the end, it all boils down to risk. A lot of lenders don’t like lending to self-employed people because there’s less income certainty. In fact, even a  bad few months for you may indicate that you can’t make your repayments.

Another factor that affects your chances of getting a home loan is that lenders track industry data. That’s why, your chances of getting a loan may drop if the lender knows that defaults from people in your industry have risen in recent years.

Let’s have a deeper look at some of the questions that are important to lenders.

Have you been self employed for less than two years?

If the answer is yes, you can still get a home loan, but there are some strings attached. Of the lenders that offer loans to people with under two years’ of self-employment history, most want to know if you have worked in your industry for longer than two years.

Say for instance, if you’re a self-employed content writer, a lender will want to see that you’ve worked in the content field previously in your career.

• Tip: Always save old payslips and get references from your former employers. This can help you speed up the home loan process.

Do you have less than one year’s experience?

Unfortunately, this further limits your options. Major lenders and banks don’t generally offer any home loan products if you’ve worked for yourself for less than one year. They need to see proof of income from your tax returns and other documentation.

But the good news is,  there are some speciality lenders that may take the wage from your last traditional job into account. The logic behind this is that if your business fails, you can always go back to a job that earns similar money to what you earned before.

• Tip: Speak to a home loan adviser to find out about your options.

How does a lender work out your income?

Your old tax returns work as a guideline for how much you earn. Lenders will try to figure out how much the business may grow and whether your income will be stable over a long period of time. How they work this out, varies depending on the lender. While some will base their estimates on your lowest income figure, others may use your most recent tax return. Others still may take your entire self-employment history into account and create an average income figure.

The technique used will impact your home loan application. That’s why it’s important to understand how different lenders look at self-employed people. After that, you should consider which technique would suit your situation.

What are lenders looking for in tax returns?

Here are three key things a lender will look for in tax returns:

1. Every tax return you send to a lender must come with a notice of assessment. Your lender will check the signatures and certification to ensure everything matches up. Doing this ensures the tax returns you send to a lender match those you’ve submitted to the Australian Taxation Office (ATO).
2. Once this is done, your lender will start looking at your returns in more detail. Some lenders ask for more documentation depending on your status. For instance, some lenders want different documents from companies than they do from sole traders.
3. Finally, there are add-backs. These are any strange expenses that your lender recognises as not being a part of your regular business. Some will add these expenditures back onto your income to create a more realistic figure. Others may not.

An add-back is any expenditure that your lender recognises as something other than an ongoing expense. Such expenditures can reduce your taxable income. However, this doesn’t mean that they lower your actual income.

Examples of potential add-backs include:

• Additional contributions you make to a superannuation fund
• Depreciation on your taxable assets
• Any one-off expenses that don’t show up again in other tax returns
• Any net profits you retain in a company. These are known as Net Profits Before Tax
• The interest you pay on any business or personal loans. Some lenders will assume that you have deducted this interest from your tax returns
• Any income you distribute to others via a trust. You may need to provide additional documentation for this, such as a letter to confirm that your trust members don’t rely on the income they receive from the trust
• The depreciation you can claim back on assets, maintenance, and management of a rental property. Some lenders also take negative gearing into account.

Your company car may also play a part. Lenders don’t consider company cars as add-backs in the traditional sense. However, they may assume your income is between $3,000 and $6,000 higher than your tax returns show if you have a company car.

Is it a good idea to go for a business loan?

It’s possible that some lenders may suggest you opt for a business loan. This is especially the case if you try to borrow as part of a partnership, company, or trust. However, getting a business loan does not benefit you if you use your residential property as the security on the home loan. You’ll have to pay more fees and a higher interest rate.

Ideally, you should use a lender that offers their standard residential home loan rates for your property. You may have to pay a little more for the extra documentation required. However, this fee pales in comparison to the amount you’d pay on a business loan over time.

Next steps:

Our friends at Small Business First have partnered with uno, an online mortgage broker, that can help you compare your options, crunch the costs and see if you’re eligible without affecting your credit rating.

This is what you can do:

• Figure out how much you can borrow based on your current income
• Have a chat with one of uno’s advisers.

This information is general in nature and you should always seek professional advice when making financial decisions.