It doesn’t matter how much you earn or how regular your income is: if you’re self-employed, that’s one more hoop you’ll need to jump through when applying for a home loan.
That’s not to say all self-employed borrowers will struggle getting finance. It just means you might need to work a little bit harder and pay close attention to the details.
First things first, says Johnny Sukkar, finance consultant with Mint Money: to boost your chances of getting an approval, you’ve got to make sure you know your numbers.
“Sit down with your broker or lender and establish what taxable income level you need to apply for credit, otherwise you’re flying in the dark and destined to be disappointed,” he suggests.
Once you’ve established your borrowing power and determined eligibility for finance, you’ll need to prove that your income is what you say it is.
“Information is king,” Sukkar explains. “When assessing a self-employed applicant’s eligibility for a home loan, lenders looks for consistency of income. They want to see that business has been ticking along steadily and maintaining a level of income that is suitable to meet their minimum servicing requirements.”
To confirm this, the lender will request the most recent two years’ worth of personal tax returns. If there is a large fluctuation between taxable income for the two financial years, the lender will generally utilise the figures that relate to the lower of the two, even if that is the older statement.
“This can often leave the applicant falling short and failing the banks initial servicing check,” Sukkar confirms. “Not all hope is lost, though. By working closely with your broker and your accountant, you can often unearth pertinent information about your business that can mitigate large deviations.”
For example, a start-up business may have a lot of one-off expenses in the early days, which a lender might take as being ongoing or recurring expenses account.
Also, if you renew a certain piece of equipment or attend courses or training one financial year, you won’t necessarily have this same expense every year, so future year’s will see this expense show up in net profits.
“My advice to self-employed applicants is to tell their broker or lender what’s been going on in the business, as a solution may not be obvious to you, but will be to a trained eye,” he says.
Finally, Sukkar says the most common issue for self-employed applicants is that their accountants are too good at reducing their taxable income, which can come back to bite you when it comes to applying for credit.
“Without adequate taxable income, most lenders will shy away from doing business with you. In this new age of regulation and responsible lending, there is increased pressure on lenders and indeed brokers to confirm an applicant’s ability to meet minimal servicing requirements,” he explains.
“Ask yourself this – if I am not able to borrow money, how is this going to impact on my ability to make the financial decisions I have planned? Am I saving more by not paying tax, or am I losing more by not being able to invest in a new home or investment property?”