Self-employed borrowers often face difficulties in securing a home loan due to their inability to present traditional employment records such as payslips and tax returns. However, a few lenders offer alternative documentation (alt doc) loans specifically designed for self-employed borrowers. With minimum documentation accepted by some non-traditional lenders, the dream of owning a home can become a reality.
Alt Doc loans allow borrowers to prove their ability to service a loan using alternative forms of documentation, such as bank statements, declarations from their accountant, and BAS statements. Borrowers still need to demonstrate that their income exceeds their expenses and that they can service the loan.
Preparing for an alt-doc loan application can take six to twelve months of solid preparation. Here are some tips for self-employed borrowers to increase their chances of approval:
- Reduce Debt: It is essential to pay down any credit card balances and personal loans and reduce credit limits. Lenders assess the total credit available to borrowers as a potential debt level, not just the amount owed.
- Speak to a Finance Broker: A finance broker can provide guidance on the structure of the borrower’s business and how their taxable income will impact their ability to borrow. Additionally, finance brokers have access to specialist lenders that tailor their products to self-employed borrowers and contractors, which most lenders do not.
- Do your Quarterly Business Activity statement: As a self-employed borrower, your income and tax obligations can be more complex than those of someone who is employed by a company. It is important to ensure that you keep accurate records of your income and expenses, submit your business activity statements on time and pay any tax assessments on time.
- Save: Saving a deposit is important, but so is showing the ability to live within one’s means and save. Demonstrating a six-month history of high savings and low expenses is essential for loan serviceability.
Alt Doc loans have some key differences from standard loans. Lenders charge slightly higher interest rates and place extra rules on loan-to-value ratios (LVR) and insurance requirements to offset the additional risk they take by lending to a self-employed borrower or contractor.
Borrowers can expect an interest rate for a lo-doc loan to be one to two percentage points higher than for a full-documentation loan. Most lenders require an LVR of no more than 80%, meaning they will not lend more than 80% of the property’s value, as assessed by the lender. Some lenders also require self-employed borrowers to pay lenders mortgage insurance when the loan amount is more than 60% of the property’s value.
In summary, self-employed borrowers have options available to secure a home loan. Alt Doc loans offer an alternative to traditional documentation and can provide a path to homeownership for those without traditional payslips and employment records. By taking the necessary steps to prepare for a lo-doc loan application, self-employed borrowers can increase their chances of success.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans and loan protection. She has offices in Sydney, Melbourne and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Your full financial situation will need to be reviewed prior to acceptance of any offer or product.