Did you know that about 15.7% of the Australian workforce is self-employed?
If you’re part of this growing group and looking to secure a home loan, you’re in the right place.
Understanding the mortgage landscape as a self-employed borrower can be challenging, but with the right knowledge and preparation, you can increase your chances of approval.
If you’re self-employed and looking to secure a loan, here are some essential tips to help you overcome these obstacles and improve your chances of approval.
1. Understanding The Lender’s Perspective
Banks and lenders often view self-employed loans as higher risk due to fluctuating incomes. To overcome this hurdle, you need to prove your financial stability.
Here’s what lenders generally look for:
| Requirement | Details |
|---|---|
| Financial Records | Last 2 years of financial statements and tax returns |
| Income Stability | Consistent income over time |
| Credit Score | Strong credit history |
| Business Longevity | Preferably 2+ years in operation |
2. Keep Your Financial Information Up to Date
Ensure your financial records are current and accurate. This includes:
- The last 2 years of financial statements
- Income tax returns
- Notice of assessments from the ATO
Having these documents prepared by a qualified accountant can add credibility to your application.
3. Understand How You’re Being Assessed
Different lenders use various methods to assess self-employed borrowers. Some may look at two years of income, while others might consider less. It’s crucial to understand these assessment criteria before applying.
4. Verify Your Self-Employed Status
If you’re a contractor or sub-contractor, some lenders might view you as an employee. Confirm your status as a business owner to ensure you’re applying for the right type of loan.
5. Highlight Business Add Backs
Include any add-backs provided by your business to potentially increase the income lenders use to assess your loan eligibility. These might include:
- Car allowances
- Depreciation
- Excess superannuation contributions
- Non-cash expenses
- Non-recurring expenses
6. Structure Your Loan Correctly
Work with a mortgage broker to set up the correct loan structure from the beginning. This can help you avoid costly mistakes and potentially access tax deductions.
7. Maintain A Strong Credit History
A good credit record is the key to the approval of a loan as well as lower interest rates. Do all it takes to keep your credit rating clean – pay bills on time, manage your debts, etc.
8. Choose The Right Loan For Your Circumstances
Loans are not all alike. There are different kinds of loans that suit specific needs more aptly. A mortgage broker can facilitate you with the right loan for the self-employed which shall serve your specific need and cash position.
9. Prepare For Additional Scrutiny
Self-employed borrowers often face more rigorous assessments. They need to be prepared to provide much more documentation if not full information about the business and income.
Common Additional Requirements:
- Business financial statements
- Profit and loss statements
- Business bank account records
- Accountant’s letter
- Consider Lenders Who Understand Self-Employment
Some lenders have more experience with self-employed loans and may offer more flexible assessment criteria. Research or work with a broker to find lenders who specialise in this area.
10. Work With A Lender Who Understands Self-Employed Borrowers
Not all lenders know how to work with self-employed borrowers. It’s important to find a lender or mortgage broker who has experience in this area.
They can make a big difference in getting your loan approved.
Benefits of Choosing the Right Lender:
- They may be more flexible with how they assess your income.
- They might accept different types of documents, like bank statements or business income forms.
- Mortgage brokers can help you through the loan application process and find the best loan for your needs.
11. Demonstrate Future Earning Potential
If your business is growing, provide forecasts or a business plan that shows potential future earnings. This can help lenders feel more confident about your ability to repay the loan.
12. Keep Business And Personal Finances Separate
Separate personal and business accounts for creditors would also afford the business clear financial books.
13. Be Prepared To Explain Income Fluctuations
If your income was highly variable over the past two years, be prepared to explain why. Reasonable explanations include seasonal patterns or an in-depth investment in growth.
14. Consider A Larger Deposit
Higher deposit offers may reduce the perceived risk of self-employed loans. This will give you a higher chance to qualify for favourable loan terms and interest rates.
15. Stay On Top Of Tax Obligations
Ensure you lodge all your tax returns with the ATO and you’re current on these. Most lenders will disregard applications from those who are self-employed if there are outstanding tax obligations.
Ready To Secure Your Loan?
Being self-employed, the process of obtaining a loan is never easy. Credit Hub will help you find the most suitable loan option. Our guide knows that finding the right loan might be personal to you, and with access to over 35+ lenders, you’ll get the right loan for your needs. Call us today for a free consultation and let’s smoothen out your way to securing a pretty good loan.
Disclaimer:
The information presented by staff or employees of Credit Hub and its associated companies is provided for general informational purposes only. We do not guarantee the accuracy, completeness, or timeliness of the data or views presented. Audience members should conduct their own research and verify any information before relying on it. Credit Hub and its associated companies are not liable for any errors or omissions, or for any actions taken based on the information presented.