You’re loving the freedom of being your own boss but at the same time, what will this situation mean for your home loan application?

Fear not! 

You can still achieve a home loan – but you will face a few extra hurdles on the way.

We look at what, why, and how the self-employed can obtain a home loan and with it, the Great Australian Dream.

What are self-employed home loans?

Firstly, there’s actually no such thing as a self-employed home loan.

But there are several home loan options more suited to the self-employed worker, along with ways and means to impress lenders.

I’m self-employed: what’s the best loan for me?

Start with low doc home loans, which we discussed recently.

These loans are ideal for those who can’t find provide an average, regular proof of income to lenders, such as payslips.

However, other everyday loans may be available to you too.

NB: No doc home loans are no longer available with the Big 4 banks and most of major lenders 

I’m self-employed: what documents do I need to provide to get approved?

Firstly, ensure your lender either offers low doc home loans or is at least slightly more empathetic to the self-employed.

This is a major step that many self-employed simply miss, or don’t realise.

For low doc and other, everyday loans, you’ll generally need to provide the following to lenders:

• Your ABN and/or registered business name
  (NB: this should preferably have been used continuously for two years or longer)

• Recent tax returns and notice of assessments
  (again, preferably the two or three most recent documents)

• Proof of ID (ie driver's license, passport, or similar)
  
• Full budget, noting all your expenditures and income
  
• Details of any external liabilities and major assets such as personal loans

You may also need to provide:

• A letter from your accountant clarifying your financial position
• Recent bank statements
• GST registration details
• Business Activity Statements (BAS)

How long do I need to be self-employed to qualify for a home loan?

A general rule of thumb is at least two to three years although it’s still possible to achieve a loan if you’ve been working less than a year (more on this a little later).

But as we mentioned above, the longer you can prove you’ve been successfully self-employed, the better.

What if I’ve been self-employed for less than a year?

You may still obtain a home loan but it will be trickier so have extra impressive documents to provide to your lender.

Think a letter from your regular accountant or even a current client.

If you’re working in the same industry as that of your former job when you were working for someone else, try providing old payslips and references from these former employers.

At worst, you’ll need to be self-employed for at least two years before lenders will consider you seriously.

What issues will I face with a self-employed loan?

Lenders are suspicious and restrictive at the best of times so if you’re self-employed with an up-and-down, irregular income, expect to hit even more mistrust – along with the need for more constrictive conditions than the average borrower.

It’s worth noting though that one of the few silver linings to come out of COVID is that there are more self-employed workers in our world now, meaning lenders are seeing far more of such people.

That being said, in a form of tough love, the Australian Prudential Regulation Authority (APRA) increased lenders’ minimum interest rate buffer from 2.5% to 3% in October 2021.

This was largely in response to the then very low interest rates as well as rapidly rising house prices, which APRA believed was putting high pressure on household debt.

APRA was also keen to rein in lenders’ easy borrowing curve, which was resulting in too many already highly indebted borrowers achieving home loan approval.

What are the lending conditions and restrictions for a self-employed loan?

Once you’ve accepted that lenders will be harder on you than on the average borrower – and that’s even if you earn more than that borrower! - you should also accept the following may be needed:

• Higher-than-usual deposit
• Lenders Mortgage Insurance (LMI)
• Higher interest rates
• "Risk" fees

How will lenders calculate my income?

We wanted to include this point as it’s one most self-employed people don’t take into account.

Lenders want to see your recent tax returns and notices of assessment because they provide strong overall proof of your business’ success over time.

Various lenders average out the taxable income on recent tax returns over several years; however, other lenders may use different ways to calculate a self-employed’s income.

Either way, a lender doesn’t want to see your income increase or decrease by large amounts, particularly if it’s been in the last two years before borrowing.

This may be fine for you if you’ve been earning a great, regular income for several years now and your business and savings are growing steadily.

The problem occurs – and hasn’t been helped by COVID employment problems – when, for example, you may have achieved an excellent income in a pre-COVID year but vice versa during or post-COVID.

If you’re in this situation, aim to find a lender who’s happy to accept, or use, just one tax return (ie hopefully, your best and most recent!).

What are the pros and cons of a self-employed home loan?

Pros:

• You can be self-employed but still buy a home!

• Even if you start on a low doc loan, you may be able to switch to a standard loan with better interest rates and other factors after a few years

Cons:

• Potentially higher interest rates including LMI

• Possibly higher deposit needed

• Limited number of lenders who understand your circumstances

We’re here to help

Whatever home loan road you wish to take, we’d love to help you travel it!

We can find you the best home loans from more than 40 of Australia’s biggest banks and specialist lenders and 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.