When you’re self employed and looking for a home loan it can seem quite complex. And often, many people think they are going to end up with a less attractive deal on their home loan because they are self-employed.
Although you may need to provide more documentation to secure a loan than if you were an employee, being self employed doesn’t necessarily mean you have to pay higher interest rates or have less choice with your mortgage. Here’s the deal with self employed home loan finance.
Proving your income
The main difference between being self employed and a PAYE employee when you’re applying for home loan finance is how you prove your income and your ability to service the loan.
To obtain a standard home loan without paying a higher interest rate, you’ll typically need to have been self-employed for at least two years and be able to prove your income with sufficient documentation to meet the lenders requirements.
To prove your income, you’ll usually need to provide your last two years tax returns, BAS or ATO assessments. Different lenders will use this information in different ways. Some will average out your income over the two years and others may use the lower of the two years particularly if there is a large difference between the figures.
If the income shown from these reports isn’t initially sufficient to meet the lenders requirements, it can pay to work with a broker or lender who can really look at the full picture of your income. There may be one off expenses which have significantly reduced your income for a particular year, but because they are not recurring expenses they won’t be having the same impact in the future. Having someone with the experience to look for these things can make the difference between being approved and not being approved for a standard home loan.
Another issue that the self employed commonly face when demonstrating their income to a lender is that their accountant has done too good a job at reducing their taxable income. In this case your taxable income may not necessarily reflect your ability to service a loan. This is another scenario where it is important to have an experienced broker or lender who can look at the full picture.
If you don’t meet the standard income requirements
If your income;
- doesn’t meet the lender’s requirements for a standard home loan
- you’ve been self-employed for less than two years, or
- you don’t have the documentation required to prove your income,
there are still options available to you in the form of low doc home loans.
With a low doc home loan, you don’t need to provide full financial statements or tax returns. The lender does still need to be satisfied that you can service the loan, so you may need to provide some documentation and sign a declaration of your income. The documentation you do need to provide varies between different lenders.
You will generally need to have a good sized deposit of at least 20% to be able to secure a low doc home loan. While most of the features of a low doc home loan are similar to a standard home loan, the interest rate will typically be higher because of the additional risk a lender takes with this type of loan. You don’t have to be locked into a higher interest rate forever though; once you can prove your income in line with the standard requirements, you may be able to transfer to a standard loan with a lower interest rate.
If you’re self employed and looking for home loan finance, look to work with a broker or lender who understands your unique circumstances to make sure you end up with the best mortgage for you.
Read more about how we can help you with your Self Employed Home Loan.
Lend Me – Mortgage Brokers – Perth, Western Australia