Real Estate

Home loan tips for small business owners

Home loan tips for small business owners

Home loan approvals and applications can be a different kettle of fish for small business owners, including contractors and sole trader freelancers working from home.

But this doesn't mean you should throw away your dream to own a home - far from it!

Home loans and small business owners: Why is it harder for us?

Why do so many lenders veer away from small business owners, freelancers and contractors?

Well, take comfort in the fact that even full-time workers in a steady, well-paid job will find lenders are highly conservative and cautious - and this is despite the fact that these workers can provide black-and-white proof of a regular, predictable income to lenders.

Small business owners, freelancers, and contractors usually can't provide such proof.

Therein, lies the problem for lenders who want to be 200% certain that they will have the money loaned to a borrower be returned to them - and the fluctuating income of a freelance sole trader or small business owner does not give lenders this certainty.

But to be fair, there's more to this issue than just this point.

Lenders, much like your family and friends, often struggle to understand the ins and outs of your income as a small business owner. They might not grasp how, why, and when your income fluctuates. In the world of home-buying, where financial stability is key, this lack of understanding can be a disadvantage. Lenders prefer certainty above all else.

But one of the great silver linings to come out of COVID is the increase in remote workers, with lenders now almost forced to take on loans from, and understand more, this group.

Australian Bureau of Statistics data in April 2022 shows 46% of Australians now work from home, on some days at least, while 34% of Australian businesses offer teleworking arrangements for some of their employees.

So, you're already a step ahead of pre-COVID, small business owner home buyers.

Plus, make no mistake, even full-time workers with a solid, regular income and a 20% deposit will still come across unexpected bumps on their home loan journey.

How to begin:

Start your home loan journey in the same way as a full-time worker: by examining every part of your finances and ensuring all your necessary income documents are up-to-date and in order.

The best place to begin is by talking to your accountant for their advice.

Ideally, you'll need to have worked as a small business owner or freelancer for at least two years and be able to provide lenders with the following:

  • Two years' worth of business and personal tax returns
  • Two years' worth of business activity statements (BAS) including profit and loss information
  • Your Australian Business Number (ABN)


If you haven't lodged your most recent tax return yet, it's best to do so before you approach a lender as it will waste less time - and stress - down the track.

You will also have a much better idea of your financial situation when you receive your tax return.

If you've worked for less than two years as a small business owner or freelancer, or you can't provide two years' worth of financial documents, that's OK - although it will make a tricky journey somewhat trickier.

Try providing your lender with tax invoices sent to clients or bank statements.

Or, talk to your accountant about providing a signed declaration or letter, with details of your income and financial situation.

NB: In amongst all your financial proof, don't forget to provide your lender with other financial details such as investments, term deposits, or trust funds.

What to work on:

While you're getting your financial documents in order (and this make take awhile), work on boosting your home loan deposit.

Aim for at least a 10% deposit - preferably a 20% one - as anything less than this will mean you have to pay Lender’s Mortgage Insurance (LMI).

The higher your deposit, the better you and your small business's financial status appear to your lender.

The same goes for your general savings and your savings history.

Clean up your business cash flow, including chasing up unpaid invoices from clients and reviewing and reducing your expenses - and such payments and reductions can in turn be an excellent way to increase your deposit.

Plus, pay down any debts such as those on personal loans or credit cards - or cut these cards up altogether or at least, reduce your limits.

"The lower your current borrowings and the better your credit history is, the more likely it is you may be approved for finance," CommBank says.

What to watch out for:

Lenders value financial stability and regularity above all else so your two years' worth of financial documents will need to be as steady as possible.

So, if there was a time in the period of your provided documentation when you weren't earning much income - or it was extremely high or low for whatever reason - expect your lender to question you about this.

Lenders may also examine your particular job industry for its risk profile as well as your skills and experience in the industry.

On this point: if you've recently switched from a long-term, full-time position to being a freelancer or small business owner in the same industry, this can bode well for you.

Lenders will essentially reason that if your new small business doesn't succeed, you can return to your full-time position in that same industry and earn a similar income to what you used to earn.

What matters most is that you can demonstrate consistent income, business growth, and a long-term trend of increased earnings.

Options to consider:

When applying for a home loan, most small business owners and freelancers will head straight to "low doc" or low documentation home loans.

Created with this group of borrowers in mind, these loans require less documentation than a traditional home loan.

Not all lenders or all loans provide this type of loan, however and borrowers need to also be aware that:

  1. You will still have to provide some documentation to lenders
  2. There are often more restrictions to these loans, such as higher interest rates or LMI and similar "risk" fees, regardless of your deposit


Another good option is to head straight to a lender more sympathetic to small business owners' and freelancers' needs.

Also, talk to other small business owners and freelancers and ask for advice on how best to approach lenders.

Finally, remember that just like your full-time office friends, you have a good chance of having a home loan application approved - and purchasing your own home.

Your home loan journey will just take a few different twists and turns, which can be well worth it in the end.

We're here to help

Whatever home loan road you wish to take, Lending Loop would love to help you travel it!

We’ve brought all the services you need altogether, under one roof, so we can find you the best home loans from more than 40 of Australia’s biggest banks and specialist lenders.

Plus, we can also help you refinance your loan to help you keep more money in your pocket.

So, give us a call today at Lending Loop.

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