How to buy a home when you’re self-employed
Applying for a home loan can be a complex process, with different challenges presenting themselves to applicants based on their personal situation. For those who are self-employed, applying for a home loan can feel all the more daunting, as it is not just as simple as providing payslips like an employee who earns a regular salary. For self-employed individuals, income can vary and fluctuate, making it more difficult to prove to a lender the regularity and size of your income.
However, there are a number of ways you can prepare your application to be as strong as possible if you’re self-employed and looking to qualify for a home loan. There are many lenders who are willing to offer loans to self-employed applicants who don’t come with straight forward income documents such as tax returns, balance sheet and profit and loss. If you’re self-employed, the process may look a little different. For example, instead of providing normal payslip documentation, your ability to service the loan can instead be proven via bank statements, declarations from your accountant and from the financial records associated with your income-earning activity.
If you’re in the market for a home loan and are self-employed, here are some easy tips to prep your application for maximum success.
- Reduce debt – just like any other applicant, reducing the size of your debt can be a great way to increase your borrowing abilities. Even if you can’t fully close a credit card down, even lowering a credit limit is an effective way to reduce your liabilities, as lenders will calculate your debt not just as the current balance in use, but as your overall access to credit at any one time.
- Cancel excess credit cards – if it’s not in use, close it down. This can be a great way to increase your credit score and your chances of seeing an approval come through on the back of your application.
- Consult a mortgage broker – mortgage brokers may be able to assist you in shaping the structure of your business and your taxable income, which in turn can have a direct impact on your ability to borrow, and may even increase your borrowing capacity.
- Pay your tax assessments on time – proof of your taxable income can be found on your tax returns, which can be a great asset as a self-employed individual looking to secure a home loan.
- Avoid tax debts – most lenders would want to see the tax-man paid back before they lend any money to you. Some may consider your application if there is an arrangement with the ATO to pay the debt back, but it will be included within your liabilities and therefore affect your borrowing capacity.
- Save – saving for a deposit can be a vital element in the mix when it comes to proving your reliability and ability to service a loan to a lender. Saving regularly also demonstrates your ability to live within your means. If you can demonstrate a minimum of six months of high income and low expenses, a prospective lender will be able to see that you’re aware of the importance of cash flow, financial planning, and accountability to your financial commitments.
Even with all of these steps in place, you may find that the loan you’re offered as someone who is self-employed differs compared to a standard loan. Lenders may offset the extra risk they’re taking with you by charging a slightly higher interest rate and applying more stringent rules on the loan-to-value ratio (LVR) of your loan, as well as the insurance requirements of your agreement.
If you’re self-employed and looking for a home loan, get in touch with me now. You may not think that you are ready straight away, but putting a plan in place now is essential to get you the result that you desire in the future.