Being self-employed can be one of the best experiences for earning a living. You run the show, so you might set your own hours, work from the comfort of anywhere you’d like, and avoid all the workplace drama found at other jobs.
But there’s also a catch: Often being self-employed means your personal finances are tied up in your business’ finances. This can make obtaining a traditional home loan tricky, if not outright difficult.
Luckily, many lenders offer options in the form of self-employed home loans. These are mortgages specifically designed to cover the often unique circumstances of borrowers who work for themselves. While a self-employed borrower might have unique financial situations, they’ve demonstrated an entrepreneurial spirit and know what it takes to run a business. Because of this, the lending industry created these special types of mortgages to match the needs of self-employed borrowers.
Determine if you qualify for a self-employed home loan
First, it’s important to figure out whether you quality for a self-employed home loan.
According to Trading Economics, there were roughly 2.4 million self-employed Australians, which accounts for close to 16.97 per cent of the country’s population in 2017. Of these, 1.4 million have no other employees, while about 6 million people work for the other 1 million self-employed Australians. Collectively, this makes up for around 11.5 million workers in the country, and the vast majority of these are small businesses.
Not only do these self-employed small-business owners need to compete against big companies and find success on thin margins, but they also face challenges in their personal life, like finding a good home loan that best suits their needs.
This is where a self-employed home loan comes into play.
The first step to figuring out if you qualify is to ensure you are fully self-employed. The Organisation for Economic Co-operation and Development defines self-employed as “the employment of employers, workers who work for themselves, members of producers’ co-operatives, and unpaid family workers.”
Farming and retail trade positions often utilise unpaid family workers the most.
Depending on the way contracts and work agreements are written, lenders might consider certain jobs as a contractor or subcontractor role that falls under the employee designation.
Review your client contracts and deals to determine whether your business model truly falls under the self-employed category.
Meet the standard mortgage criteria
If you truly qualify as a self-employed individual, then you should go through the rest of the standard mortgage checklist to ensure you meet the minimum threshold for a traditional loan. Both types of mortgages will still require the same base-level criteria, so you can easily run through this list to see if you meet all of the items.
This will include the following:
- Being an Australian Citizen or Australian Permanent Resident.
- Being at least 18 years old.
- Currently residing in Australia.
- Purchasing a unit or home that’s at least 40 square metres.
- Borrowing no more than 95 per cent of the property’s value.
- Buying either a brand new or established property.
- Buying a property you can own either personally, in a company, or through a trust.
- Having a valid phone number and email address.
These requirements shouldn’t be too difficult for self-employed borrowers to meet. Still, be sure to double check that you can cross these off your list before applying for a loan so you don’t find yourself in a precarious situation further down the road.
Keep your financial records current and organised
Once you’ve determined if you’re truly self-employed and you meet the other standard mortgage criteria, it’s time to begin gathering your pertinent financial documents and information.
Lenders assess self-employed home loans in a similar way as traditional home loans. This means you will need to collect and organise all your financial records for the lender’s review.
But unlike a regular employee who can just show a string of pay stubs, being self-employed doesn’t always work out so smoothly. You might not pay yourself a regular salary, and instead dole out income to yourself at random intervals, depending on your company’s revenue cycles. This makes having a consistent and documented proof of income source absolutely critical.
Due to the nature of how a self-employed individual receives income, lenders tend to determine your borrowing capacity based on declared taxable income, not gross turnover. This means you’ll need to demonstrate proof of income by providing at least two years of personal and business tax returns as well as income tax assessments. This information will help lenders make a more accurate evaluation of your potential to repay the mortgage.
If you’ve already been maintaining good record-keeping management, this probably won’t be a problem. If you have not been practising good record-keeping management, this is the perfect time to implement a new comprehensive system. Not only will this help you with your loan application, but it’ll make things much more streamlined and efficient for you business too.
Consider home loan pre-approval
If you already have all of your financial documents in order and you’ve maintained good record keeping of your income source, you could also consider applying for loan pre-approval.
A lender will provide a loan pre-approval letter that incorporates your income and savings, stating that they will approve your loan based on a suitable property. These are not full-proof, and circumstances can change during the homebuying process, but they are helpful, especially for self-employed borrowers who are in a unique financial situation.
What if you’ve just become self-employed?
Since lenders typically require at least two years worth of business income taxes and tax assessments, being self-employed for fewer than 24 months can make obtaining a home loan even more difficult.
For some self-employed borrowers, it might just make sense to wait out the two years of doing business before pursuing a mortgage. Not only does this time frame provide lenders with a better window into your business’ extended financial situation, but the two-year lookback also takes into account the fact that the majority of small businesses don’t last more than a few years. By demonstrating a multi-year source of income, you reduce a lender’s potential for risk exposure, making your loan application more likely to get approved.
If you’re unwilling or unable to wait the two years, you still have options. You could look into getting what’s called a low doc loan. While the usage of these types of mortgages has declined in recent years because of improved lending requirements, a low doc loan can be helpful for newly self-employed borrowers. Keep in mind though that these are still mortgages, and will also have their own set of criteria that need to be met. Plus, low doc loans also typically have higher interest rates to consider.
In some rare instances, lender might accept your pay stubs from the job you held prior to becoming self-employed. These show that if your business does shutter, you can potentially find another job at your old pay rate. But this isn’t always a sure bet, and it still might not suffice to convince a lender to approve your application.
In the end, two years might seem like a long time to wait to finally move into your dream home, but considering the alternatives – getting your loan application rejected or paying higher interest rates – it might make more sense to stick it out until you’ve accrued a longer financial paper trail.
Talk to an expert
No matter your current state of self-employment, you should take time to speak to an experienced mortgage expert. Local banks and lending institutions don’t always have the tools, experience, or networks in place to deliver the types of loan needed for outside-the-box borrowers. And clearly a cookie-cutter mortgage is not the best option for employed borrowers.
Working with a mortgage broker will give you the professional industry insight you need to put together a strong home loan application at the right time. These finance specialists are uniquely positioned to assist non-traditional borrowers who don’t check off all the boxes for the standard mortgages, such as self-employed individuals.
Best of all, mortgage brokers work passionately and proactively to deliver valued outcomes for their clients.
Speak with a Redrock Mortgage specialist today for more information.