Running your own one-person business or being self-employed is a major goal for many entrepreneurs. You get to be your own boss, set your own hours, and make your own money. However, it does create some potential obstacles, such as qualifying for a home loan.
There are two main reasons why owning your business or being self-employed might impact a mortgage application: maximum loan exposure or lack of financial documents.
Thankfully, self-employed workers do have an option for obtaining a mortgage in the form of a low doc home loan. Let’s take a look at how a low doc home loan offers self-employed workers the opportunity to obtain a mortgage, and how maximum loan exposure might impact a mortgage application.
Low doc home loans for self-employed workers
As their name implies, low doc home loan applications require less financial documentation than regular home loans. Somewhat of a new type of lending vehicle, low doc home loans are on the rise. Their growth in popularity stems from a higher demand from people who need them. In this case, it’s the increase in self-employed workers.
Unlike people who work for a company and receive regular paychecks, self-employed individuals often have infrequent income streams. The gig economy and the rise of consultants, commission workers, independent contractors, and freelancers have all exacerbated this trend. Workers in these fields typically get paid seasonally or in infrequent intervals. This creates complications during standard mortgage applications when lenders request documentation of regular income streams like employment contracts or payslips.
Low doc loans, on the other hand, offer flexible financing options for self-employed individuals with non-standard documentation. Applying for a low doc loan usually requires signing a self-certifying income declaration based on self-employed activities. This, along with a few other documents, such as a letter from your accountant, a business bank statement, or a business activity statement, is typically all you’ll need.
When maximum loan exposure is an issue
Even with the flexibility allowed in low doc home loans, the lack of financial documents inherent in low doc home loans means these mortgages do come with other restrictions. Restrictions may include limits offered in the size of the home loan, or disqualifying certain types of property or particular locations.
Another restriction arises when self-employed workers have exposure to other loans, particularly if they’re at maximum loan exposure. Since many self-employed individuals are also running their own business, there’s a chance they’ve borrowed capital funding. It’s not uncommon for businesses of all sizes to leverage debt for property, operating costs, system upgrades, or numerous other investment purposes.
Lenders will therefore incorporate a borrower’s current loan exposure into the low doc application. This serves to limit lenders’ risk if the borrower becomes overburdened with debt obligations and interest payments.
What’s the limit for maximum loan exposure?
Fortunately, the loan exposure cap is large enough to allow self-employed individuals to carry some debt without it interfering with a low doc home loan.
The majority of lenders typically set maximum loan exposure below $1 million, although this number may vary depending on the nature of the loans. Not only does this include any debts currently owed due to self-employment or running a one-person business, but this also covers any additional mortgaged properties. If a borrower has $1 million or more in loans, lenders may deny them for additional credit.
One way borrower’s can overcome this obstacle is to reduce their loan-to-value ratio by approximately 60 per cent.
Are you a self-employed worker interested in whether maximum loan exposure might impact your chances of owning a home? Get in touch with a financing specialist at Red Rock Mortgages to learn about our low doc home loan product suite.