Self Employed Home Loans
Self Employed Home Loans Guide
Self employed home loans are not that difficult to get for those business owners that are into detail and keep their business records up to date. Especially, tax returns and financial reports.
So, if your records are up to date and you have available the documents a lender will want to see, applying for a self employed home loan will not be that much different than a PAYG applicant when it comes to choosing the right home loan.
The only genuine distinction between a PAYG borrower and a self employed borrower is that lenders find it more challenging to figure out how reliable a self employed borrowers are going to be in making their payments over the longer term.
In other words they deem self employed borrowers to be in a higher risk category. A PAYG borrower with most lenders will in most instances only have to stump up with one to two payslips for income verification purposes. Whereas self-employed mortgage borrowers will be put through a more complex assessment gauntlet in regards to financial documentation requirements.
Simply because, self employed lenders know that businesses income can and will vary from month to month. Therefore, when lenders assess loans for self employed individuals they like to get a good understanding of an applicants track record and future prospects through their profit and loss statements as well as balance sheets.
Keep in mind these statements can often be 18 months old and even older at the time of the assessment. Meaning, they may not reflect what is currently happening in a business, never mind what could happen down the road.
How Will A Self Employed Home
Loans lender assess you?
What many are not aware of is that mortgage lenders have a regulatory (legal) obligation to make certain that any residential loan applicant isn’t getting in over their head when it comes to the loan amount and subsequent reapyments they are asking for. Lenders can no longer just depend on the value of your house when it comes to securing their loan. So that’s why it’s crucial to them to take their time about taking a long hard look at your monetary position.
As previously touched on, applying for self employed mortgages in Australia is not necessarily as straight forward as it would be if you were a PAYG employee. One of the benchmarks all lenders use to gauge the viability of giving someone a home loan is the ‘risk factor’.
In other words, how likely is it that they will get their money back if they lend it out. Therefore, applications for self employed loans come under more instense scrutiny than your regular PAYG employee loans.
A PAYG employee applicant who can demonstrate that they have been in stable employment for a solid period of time will in most cases only have to come up with a recent pay slip or two to confirm their income.
For self employed borrowers who want to secure an interest rate that’s as competitive as what a PAYG employee can obtain will need to satisfy the ‘risk factor’ benchmarks that lenders employ. It should be kept in mind that these benchmarks can vary (usually slightly) between lenders.
How Do You Boost Borrowing Income
For Self Employed Home Loans?
When it comes to applying for a self employed mortgage, applicants have two main options
1/. The first is known as a ‘Full Doc Loan’. This will require you to provide full documentation including personal and business tax returns as well as financial statements where applicable. This option will open you up to being able to select from most lenders offering self employed mortgages.
2/. The second is called a ‘Low Doc Loan’ This is a whole separate subject and you can Go Here For More detailed Info. In brief, this can be viewed as a shortcut for those self employed borrowers that cannot for whatever reason provide the full documentation main stream lenders require.
3/. Once upon a time their used to be a thing called ‘No Doc Loans’. Alas, since the Global Financial Crisis (GFC) these have been phased out.
What’s required For A Self Employed or
Sole Trader loan application?
In order to get the best deal on a full doc loan, you do need to know a few basic steps that will save you time and money when it comes to applying for a self employed full doc loan. The following guide will help make your search more efficient and less stressful.
Keep in mind it won’t be the end of the world if you don’t meet the following criteria as there are alternative options for those that don’t have all of the required ‘full doc’ documentation (low doc loans).
Those self employed mortgage lenders giving the most competitive deals on full doc loans will want to see the following proof of income for self employed individuals;
1/. ABN registered for a minimum of 2 years
2/. For sole trader loans, personal tax returns for a full two financial years.
3/. Partnerships require personal and partnership tax returns for a full two financial years.
4/. Pty Ltd companies require a full two years personal tax returns for all directors with more than 25% of the shares
5/. Two years company tax returns and two years full financial statements. That is, Profit and Loss Statements and Balance Sheets.
How Competitive Are Loans For Self
Employed Mortgage Rates
The above is what you’ll need if you want the most competitve self employed home loan interest rate deal.
There are exceptions to that though, albeit you will more than likely pay a higher rate of interest.
How much higher? Again it goes back to what we discussed previously about the ‘Risk Factor’. The less documentation you provide, the higher the risk they’ll consider your application to be.
When looking for the best deals on self employed loans, lenders will look at a number of factors, including the strength of the proof of income for self employed income, credit score/rating, and how long you have been self employed. Lenders want to see evidence of steady income so that they have some idea of your financial stability to pay your commitments and future prospects for the same.
There are a couple of lenders who offer an exception on the two year tax returns and two years financials policy requirement. As long as you have had an ABN for two years those lenders will consider assessing your application on a one year tax return basis. They will require your latest tax return and financials and they cannot be more than 18 months old.
This can be a big advantage for newer (growing) businesses or a business that may have had a slow year. Because, those self employed lenders that want two years of financials they will average the income from the two years of tax returns provided. That means, if one of the two years is substantially lower than another the amount of income they use to calculate the borrowing capacity can be reduced, sometimes significantly.
Are Specialist Self Employed
Mortgage Brokers Any Good?
An experienced self employed mortgage broker will have the knowledge on how to analyse your financial profile and be able to quickly match you up with the best self employed lender.
When you’re running your own business there is no doubt time is money. As a self employed mortgage seeker you won’t regret employing an experienced well seasoned self employed mortgage broker specialist who will specifically focus on getting you the best fit home loan at the best rate. Saving you valuable time and money. It will feel like you have another specialist executive on your team who will take the burden off your hands on one of those daily chores that have to be done.
An important thing to keep in mind when you are looking for a self-employed home loan in Australia is that you should shop around to find the best offer. There are any number of specialist self employed mortgage lenders out there, but not all of them are created equal. Do a bit of research and see if you can find one that’s a good fit for you.
For the sake of repeating myself, as business people we all know time is money and it will pay dividends to engage with the services of a savvy specialist self employed mortgage broker who has in depth experience. A lot of self employed loans can go through a lender without a hitch. Nevertheless, depending on how complex the application being tendered is, many can hit a minefield when applied for.
99.999% of self employed mortgage brokers offer their services for free, they get their commissions from the lender you select.
What are, and can Loan Add Backs be
Used to boost Borrowing Capacity?
While we’re on the subject of income used for calculating the borrowing capacity, when it comes to self employed loans it’s worth reviewing what is known as loan add-backs. That’s because, Add-Backs can substantially increase an individuals borrowing capacity.
That said, it can also be a tricky track to try and traverse. Some lenders are more generous than others when it comes to adds-backs and some don’t allow them at all.
Common add-backs that can be used to enhance an individuals borrowing caapcity include loan interest paid in the course of business, certain categories of depreciation and one off expenses.
This is where a seasoned specialist self employed mortgage broker will shine for many self employed mortgage borrowers. Because, they will have mastery over reading self employed’s tax returns and company financials, enabling them to quickly spot that kind of information and match it with the appropriate self employed lender.
Is There Something I Might be Missing?
By the way, you might want to consider obtaining a copy of your credit report and credit score in advance of submitting any home loan application to reassure yourself that there isn’t anything on there that is going to embarrass or slow you down.
I can already hear some of you saying, “No need for that, I’ve never made a late payment in my life”. However, we have had customers where their identity has been stolen and defaults have ended up on their credit report because of unpaid purchases that were made using their stolen identity details, without them being aware of what’s happened
When that happens, we can tell you through experience that you won’t be happy, as the proof of innocence will fall squarely back on your shoulders. The process you have to go through to proof your innocence will be ‘pulling hair out’ frustrating.
We’ve also had customers who have developed convenient amnesia and said ‘I forgot that was there’ (lol).
It pays to keep abreast of these things. Credit bureaus are obligated to give you a free copy once a year. However, you must ask first.
What if I don’t Have the Above
Any number of prospective self-employed home loan borrowers can find it difficult to obtain self employed loans because of not being able to provide the up to date financial records that most lenders look for.
For those that don’t have their tax returns and financials up to date, don’t despair as there are many low doc loan options in the market place.
The range of options available are probably too many to start listing here. However, if you would like more detailed information on your suitability for a low doc loan Go Here.
If you don’t have a good credit score, you may have to consider paying a higher interest rate. When you have a high score, it gives lenders the assurance that you will be able to afford the repayments on your loan.
Self-employed home loans 13 point checklist:
1. Look around for the best options
Don’t simply keep going back to the same old financial institution where you’ve been keeping your business or domestic savings accounts. Banks understand and count on this complacency factor, because they know old habits die hard and they really don’t have to extend themselves to keep your business. This means, your lender is going to test you for the best deal they can get out of you.
Don’t be lazy, don’t be a sucker, over time it could cost you tens of thousands of dollars
2. What are your financial records like, are they up to date?
Those that have their tax returns, financial statements, Individual ATO Notices of Assessments (ATO NOA’s which are provided by the Tax Office shortly after you submit your Tax Return), up to date and ready for the past two years will be primed to get the best and fastest deals. Keep in mind, banks/lenders will only accept those tax and financial documents that have already been lodged with the ATO.
3. Be aware of how assessment methods can vary from lender to lender
Among self employed lenders you will encounter contrasting assessment methods for self- employed loans, one might use an average of the last two years taxable income, the next one could take the lowest of the latest 2 years tax returns. Then, there are others that will calculate using a variance method.
4. Self-employed, are you sure?
Even though you may be under contract to a company you may be able to get away with being considered as a PAYG employee with some lenders. If you have an ABN number and you’re required to submit tax invoices on a regular cycle, then you probably will be assessed as self employed. However, if you have a contract and they provide you with regular PAYG payslips, you may very well be able to claim you’re an employee.
5. Do you have business add backs that can boost your borrowing capacity?
Exactly, what are business add backs? These items can usually be found in the profit and loss statement of most sole traders or companies financials. They can be used to boost the amount of income that lenders use to calculate if an applicant can afford to have the loan amount they are asking for. The type of addbacks that are considered include:
- Asset depreciation
- Interest expense that no longer exists or is being refinanced
- Vehicle allowance
- Any superannuation contributions over the mandated Government benchmark
- One off expenses or regular expenses that have ceased (non-recurring)
- Expenses that can be classified as non-cash
6. Segregate or separate your loan purpose
Should you be borrowing for business as well as personal reasons split your loan into identifiable segments. Self-employed individuals are often likely to be able to claim a tax deduction on any interest used for business purposes. This can make it essential that any loan structure you set up is done correctly right from the very beginning. It may be too late if you realise down the track that you made a mistake.
7. Have your business cash flow go the extra mile.
You can save interest by employing your idle cash flow. Why not include a facility with your new self employed loan that allows you to deposit idle cash such as pEnding GST payments before it’s due to be remitted. There are several lenders who will aLlow you to have more than one offset account with your home loan account.
8. Why would the tax office be interested in your home loan?
There have been instances in the past where low doc loan applicants have overstated their income in order to boost their borrowing capacity. However, some of those unfortunates were eventually audited by the tax office and they used the tax payers low doc income declaration for tax assessment purposes and then penalised for under reporting their incomes. So, be careful of pulling income figures out of a hat as you could end up with an unpleasant tax headache.
9. Business loans attract higher interest rates?
If you have a business loan, the bank is probably going to charge you a higher rate of interest and require annual reviews – which will cost you time and extra fees. Know that some lenders will lend for business purposes at home loan rates if you use residential property as security.
There’s no doubt that the bank is going to charge you a higher rate of interest for any business loans you have or apply for. They also cost time and money in the way of extra fees and regular reviews. Be aware that if you have sufficient equity in a residential property there are lenders that will lend for business purposes at home loan rates against that type of residential security.
10. Have you thought about what your future needs are going to be?
Let’s face it, any time you apply for a loan or look at refinancing an existing one it takes time and money. Processing a loan application (depending on the lender) can take anywhere from 4-8 weeks. When you set up any loan, take some time to put some thought into what your future needs are going to be. Look down the road for say 3-5 years and assess what your financial needs could be so you can avoid having to re-structure or rework your home loan too frequently.
11. When did you last look at your credit report?
The world revolves around credit – especially small businesses. If they didn’t carefully protect their credit profile many small businesses wouldn’t be able to operate. Credit bureaus are obliged to give individuals a free credit report once a year. Take advantage of that and monitor what’s going on with your credit report. Especially now, with the advent of Positive Credit Reporting that tracks all your credit accounts and posts your credit behaviour onto you report on a monthly basis.
12. Is your home loan custom tailored to your needs??
Over the last 20-30 years the range and types of available residential home loans has increased dramatically. Analyse your cash flow needs and ask yourself (or a self employed home loans expert), is my home loan structured the right way (efficiently) for providing the maximum flexibility.
13. What’s laying in your business closet?
Note: Should you be listed as a Director of any type of company, this is going to show up on your credit history report. Any lender you apply to is going to drill down and want to know if that listing is an active source of income. Should that be a dormant non-trading entity be prepared to get your Accountant to give you written confirmation of it’s status. Your chosen lender will ask you for it and it will allow them to waive any further documentation requirements.