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Self Employed Loans
There are so many benefits to owning your own business and working for yourself; making your own hours, working in your time.
Many people earn a good living being self- employed but find it’s hard to qualify for a home loan or get access to the mortgage they want. Here at Lloyds Financial Services we specialise in home loans and financing and want to help business owners know what to expect when shopping for lenders.
What is a Self Employed Home Loan?
Most people prove their loan worthiness by the amount of yearly income they make and their credit history and score. Working as an employee for a company, your income is verifiable and proven by your tax information.
When you are self-employed you most likely don’t have ready access to these documents to work with, and even more so, the documents you have may not accurately portray the income you actually take home. This is because many people who work for themselves can take tax advantages from a slew of tax deductions related to their businesses, ranging from retirement plans and home office deductions to business meals and entertainment. It reduces their taxable income so the taxman doesn’t empty out their pockets at tax time!
But when mortgage underwriters look at tax returns for proof of income, they only see the income AFTER business expenses have been deducted. The result often is a much lower figure than what the self- employed person actually takes home and can reduce the loan amount the borrower can qualify for or even result in rejection.
For these reasons, a self-employed person requires extensive planning and researching banks or financial institutions that work with people in this situation will ensure that you get the best result for your needs. A self-employed home loan is simply one that will take into consideration all of the above.
How Do Self Employed Loans Work?
There are a couple things you should expect when you begin your search for a lender for your home loan if you’re self-employed.
As a self-employed borrower, lenders may not see you as an ideal candidate. Rates advertised on mortgage websites are forprime borrowers who are considered to be particularly creditworthy because of their steady, verifiable income and work history, as well as an excellent credit score.
Because your income can be harder to verify, you can most likely expect to pay higher interest rates than what’s advertised by a bank or mortgage lender.
Keep in mind you will also have to put in a little more work into finding lenders who are willing to work with you in the first place. Because banks shy away from riskier investments to protect their financial interests and reputations, it may reduce the type of loan they are willing to give you. And with banks needing to see a lower loan-value ratio, you may end up needing to come up with a larger deposit.
Below are a few options to research and worth discussing with your lender if they would work for your situation.
- Low Documentation Home Loans. This type of mortgage is based on what you tell the bank your income is and the bank does not seek to verify this amount. These loans are often called low-doc loans; this is because lenders will not verify how much you make, but they may seek to verify the sources of your income. Be prepared to have a list of clients and documentation of cash flow. The bank may also want you to submit your last few tax returns. There are a couple different options with this, but they basically allow the bank to receive your tax return directly from the ATO so there is no falsifying returns to the mortgage company or allows the bank to examine the form for the years you specify.
- No Documentation Loan: In this type of loan the lender will not seek to verify any of your income information. This may be a good option if your tax return shows business loss or a very low profit. Because it is riskier for the bank to loan to somebody with unverifiable income, expect your mortgage rate to be higher than other loans.
How Do I Get One?
Extensive planning, at least two years before the big purchase, is the best way to get the home loan that you want. Typically borrowers need to provide two years’ worth of tax returns, which often don’t accurately reflect the take-home pay of self-employed people.
You can start by writing off fewer expenses in the years leading up to the purchase and clean up your finances so that your business doesn’t commingle with your personal funds.
For example, pay for a computer using a business credit card rather than a personal one because some lenders may not count that debt against you because it belongs to the business.
Also show year after year increases. While lenders will ignore seasonal spikes and valleys in income by averaging out income over 24 months, they won’t like seeing a decline.
Your best option is to seek out the servicers of a qualified mortgage broker who can do all the research for you, and find the best loan for your needs. It’s likely that a low-doc or no-doc loan will be your best option.
The sooner that you get in touch with a mortgage broker, the better, as there will be some things you’ll need to put into place to make the likelihood of you accessing a ‘self-employed’ home loan a success.
Purchasing a home can be one of the most rewarding investments, both personally and financially, if you go about it the right way. Analysing your finances and making sure you are secure enough in your business and in your life to afford a home is the key to make owning a home a great experience.
Any person is susceptible to unnerving surprises, like loss of work and money struggles, but working for yourself requires a higher risk and pressure in continuing a consistent income. Losing a home to foreclosure or bankruptcy can be detrimental to your financial future and credit history. So make sure, before you consider this large investment, that your particular situations positives outweigh the negatives or risks.
While stepping outside conventional financing might be the way to find your home loan as a self-employed person, you’ll need to ensure that you’re take the right steps and working with the right people to help you achieve this.
This option is for investors only. You can in some cases use your superannuation to buy an investment property. There are a lot of details that need to be dealt with. You will need to have a self managed superannuation fund (SMSF) set up and you borrow the funds through that vehicle.
However it is possible to obtain a low deposit home loan through your superannuation balance. It is not recommended that you follow this strategy unless you have obtained expert financial and legal advice.
Obtaining a low deposit home loan is possible and relatively speaking quite common in Australia. Typically borrowers will used of the two main methods being Lenders Mortgage Insurance and/or Guaranteed home loans. These two options while more involved than a standard home application provides both real and practical ways to obtain your home via a low deposit home loan.