Details of Article: 5 things the self employed should know before applying for a home loan

5 things the self employed should know before applying for a home loan

5 very important points that will assist the self employed in understanding how to approach a lending institution for a home loan and will give an insight into how the bank perceives your credit status.

The accounting system allows the self-employed to offset their expenditure against their income. They also only have to declare their profit once a year after those expenses have been deducted. This set up means that it is very difficult for the self employed to show their true;

income and be measured in the same way as employees are. There are stories of business owners being rejected for home loans, but the employees that work for them being approved, no questions asked. That is why the self employed need to be armed with the correct information to ensure they are able to obtain the best loan deal.

Banks don’t understand the self-employed

The average bank has a checkbox mentality. They require you to fit within certain parameters for you to be considered a suitable applicant for a loan. Self employed people in particular fall outside those parameters. Banks like the safety of regular salaries and savings plans. They don’t like people who leverage, borrow, have irregular income and pay their tax once a year. Even though most self-employed are some of the more financially viable people in the country you will have to show at least two years of good profit before you are even considered for a loan. As a self-employed person you are far better off finding your loan elsewhere.

You need to demonstrate loan serviceability in your application

Loan serviceability is the one key aspect that all money lenders look at. They need to know if you can afford to keep up the monthly repayments to your loan. Being self-employed, it can be difficult to prove your income but don’t rely on the loan company to help you. Get a statement of income signed by your accountant to highlight your income. If you have other forms of credit and have had a good track record, note this on your application as it is also looked upon favorably.  

You should have filed at least one tax return as a self-employed person

It is difficult to prove your true income when self-employed. The fact of the matter is the longer you have been self-employed the better it is for your application. If you have filed at least one tax return since you have been self-employed then the money lender can make some kind of judgment based on your income history. If you have no income history then you will find it difficult to obtain a mortgage.

A low doc loan may be your only option

A low documentation loan allows you to borrow money for a mortgage while not having to provide documentation to prove your income. To obtain a low doc mortgage you will need to provide at least 20% (but often closer to 40%) deposit as security.  

When you normally apply for a loan, money lenders ask for two years of financial and personal information. As this is bypassed in a low doc loan, the first two years of the loan act as a probationary period. That means your interest rate for the first two years will be above the average standard variable rate. After the probationary period ends you will have proved to be a suitable customer and you should be entitled to all the benefits of a normal loan customer.

Not being an existing homeowner may a the deal-breaker

Even if you are applying for a low doc home loan you will need to show you have security behind your application. This is normally demonstrated by a sizeable deposit but if you are unable to provide that deposit being an existing homeowner with equity in your property may be suitable. The principle behind this is that you have the means to service your loan for the term even if all the normal indicators aren’t in your favour.