If you’re self employed and try to secure a home loan or investment loan, you may have been misinformed about what lenders are looking for and you may have heard
- it’s harder to get a loan if you run a small business;
- you’re less likely to get approved;
- you’ll pay a higher rate; or
- you will NOT be able to borrow as much, or you need a low doc loan
Or you may
- think a “self employed home loan” (commonly known as a “low doc home loan” or “no doc home loan”) is your only option
- have been told you can only borrow from 60% to up to 80% of a property’s purchase price
Well, I’m going to bust these myths in this post and also explain the things you need to know if you’re applying for a loan as someone who’s self employed.
The truth is
A bank sees anyone who’s self employed no different to someone who earns a salary!
As a busy business owner or someone who’s self employed, it’s true that you may
- Not have consistent income throughout the year
- Not have completed tax returns recently
- Have insufficient documentation available at the time
When it comes to getting a loan whether you’re self employed or earn a salary, it’s all about being able to show the lender that you can service your loan. As long as you can show that you’ve got consistent income then a lender will treat you exactly the same as every other person.
In fact, if you have a good business, there are some great benefits of being self employed when applying for a home loan.
Think about it from a lender’s perspective – they are only interested in finding out if you can meet the repayments on a loan.
So if you turned up with no proof of what you’re earning and what your expenses are, then why would they be comfortable lending you hundreds and thousands of $$$?
When an employee who earns a salary applies for a loan, he/she needs to provide his/her:
- Most recent payslips and/or their employment contract
- Bank account statements
- Personal tax returns
- Documents supporting their other sources of income (e.g. rent, interest and other investments)
- Details of their monthly living expenses
If you’re running a business, then a lender would naturally want to see your business tax return as well to verify your income position in order to approve your home loan application.
So it doesn’t matter if you own a business or work for a business – as long as you can prove that you earn consistent income, then a bank will assess you in the same way as anyone else.
Contrary to popular belief, a self employed person can actually borrow up to 95% of a property’s purchase price depending on their income.
This is based on their business’ tax returns.
For businesses that haven’t done their tax returns, it’s therefore best you ask your accountant to get any outstanding tax returns lodged as soon as possible, to make things easier.
A Low Doc Home Loan is NOT the only option for self employed
Everyone talks about low doc loans (or even no doc home loans) for those who are self employed or who run a small business. “Low doc loans” and “no doc loans” are almost always less attractive than the standard full doc loans. Because you don’t give the bank much information, you usually won’t be able to borrow as much, and the interest rates offered also tend to be higher and with higher fees.
Applying for a low doc loan will still require the applicant to supply documents, such as:
- An accountant’s declaration; or
- Business activity statements (BAS); or
- 3-6 months of trading statements (bank statements).
However most small businesses that we’ve dealt with have no problem getting a standard self employed home loan, investment loan or even a small business loan through Mortgage Corp.
The only difference is that we, as your mortgage broker, have to work harder because there’s:
- more paperwork to fill out;
- more numbers to crunch;
- working with your accountant; and
- more thinking to do.
Below are a couple of Facebook reviews we recently received from two separate self employed clients. They had so much trouble with banks and other brokers until they found Mortgage Corp.
“We started looking to purchase our family home and had no success with the banks as Shaun is self employed. We were so happy to find Neil (from Mortgage Corp) as he made the whole lending process so simple. His honesty from the start helped us understand everything, every step of the way. His easy going and friendly nature made us feel very comfortable and we owe it all to him because now we have our family home thanks to Neil’s efforts.” – Shaun & Natalie
“I’ve been self employed nearly all my life and refinancing is never easy, but thanks to Neil getting the job done was easy, nothing was too hard he just got on with it. Now things are looking up, our home loan is at a great rate and our business has moved and expanded to the new location ready for the season ahead. Thanks Neil, couldn’t have done it without you.” – Glenn
For more Facebook reviews on Mortgage Corp or stories of self employed loans, visit Mortgage Corp Facebook page.
Things you need to know if you’re self employed and applying for a loan
If you’re self employed, you are no different to a salaried worker from a bank’s perspective as long as you can show a lender that you have:
- been in business or have had your ABN for at least 2 years;
- been making a profit each year;
- paid yourself some wages or income; and
- lodged your tax returns for the last 1-2 years (some lenders will consider your application if you’ve got at least one tax return, though not all lenders).
Lenders are looking for consistent income
To make sure you can meet repayments. If your taxable income is lumpy over the last 2 years, a bank may take an average over those years or they may have a different policy. Some lenders will only require one completed financial year’s return.
Lenders will often also rely your tax returns to determine your borrowing power. In one of my previous posts – Mortgage Tips For Self Employed- How To Increase Your Borrowing Power – by paying an additional $6,000 in tax, a tradie client was able to increase his borrowing power by $159,000 to buy the house of his dreams! Whilst a good accountant is always keen to reduce your tax where legally possible, think about how this might affect your goals in the long run.
An experienced mortgage broker knows how to package your loan for fast approval
A good mortgage broker will be able to navigate different lenders’ requirements to find the one that will assess your income in a way that best meets your goals.
For example, a start-up business may have one-off, upfront expenses when starting out in the 1st year. Likewise other businesses might be spending significant amounts investing in or upgrading their tools or equipment. Some lenders might treat these costs like any other ongoing expenses, whilst others might be prepared to recognise these costs as non-recurrent or not ongoing.
Different banks have different ways of assessing the information on your tax returns, based on your situation. We’ll strategically package your application and present it to the lender in a way that maximises your borrowing power. We’ll also suggest to you ways to increase your borrowing power so that you can put the best foot forward to the banks by looking at factors such as:
- Tax depreciation;
- Interest expenses; and
- Paying above normal super contributions.
Ultimately, being able to provide as much information as possible about your income and expenses will put you in the best position of getting the loan you need. The key also is working with an experienced mortgage broker who understands the ins and outs of getting a loan for the self employed.
Mortgage Corp Loan Specialist knows how to strategically structure your loan to save interest, tax and maximises further property investment opportunities
Now, you may be overwhelmed by all the information and not know where to start or you may not have the time, skills, experience or resources to plan strategically and maximise your returns (including tax savings).
But that why we’re here.
Whilst most banks and mortgage brokers focus on merely getting you a loan, Mortgage Corp is committed to getting you a comprehensive investment result which includes a loan structure that facilitates tax savings, free up your cash flow and maximises further property investment opportunities.
For busy business owners, we provide a seamless concierge service where we take care of everything involved in obtaining finance. By asking you the right questions, we can do the groundwork so that your time is freed up to focus on things that are more important to you, for example, your family and your business.
Take advantage of our Free Loan Structuring Strategy Session today and let us guide you to not only get a loan but build a solid property portfolio.
About Mortgage Corp
Based in Mount Waverley, Mortgage Corp is the most trusted mortgage broking firm in Melbourne with consistent 5 star customer reviews. Mortgage Corp specialises in helping successful professionals and property investors maximise their return and strategically structure your loan for long term investment success.
While most banks and brokers focus on merely getting you a loan, Mortgage Corp is committed to getting you a comprehensive investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!
Mortgage Broker’s service is free, why not get a good one ? Mortgage Corp consistently receives 5 star customer reviews! Click here to find out why
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only 19 MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.