It’s the spring selling season and despite the lockdown restrictions, house prices are still rising. According to the ABS, residential property prices rose nearly 7% in the June quarter 2021. It’s not easy to purchase a home as prices continue to rise especially for first home buyers who struggle to save for a deposit. It is daunting for business owners who need to provide a lot of documentation to prove the business income. The last thing you want is a lender declining your application because you’re unable to prove how much your business is getting.
But here’s some good news. There are ways to get a home loan approved whether you’ve been in business for more than 2 years or less. Here are tips for anyone who owns a business to get their home loan sorted.
What paperwork should you provide?
Self-employed people derive their income from their own business. They earn income and pay out business expenses during the year. The difference between income and expenses is either a profit or a loss. At the end of the financial year, those self-employed are required to complete financial statements and tax returns which are lodged with the taxation office. With most banks, full verification means providing a minimum of 2 years proof of trading.
Under a company structure, self-employed people applying for a home loan need to provide the following as the minimum requirement to prove their income.
- last two years of company tax returns
- last two years of other financial statements (e.g. profit and loss statements)
- last two years of personal tax returns
- a minimum of 2 years ABN and 12 months of GST registration.
If you’re a sole trader which is the simplest business structure, the minimum requirements are your two most recent personal tax returns and most recent ATO notice of assessment.
How do lenders treat self-employed applicants?
When lenders are looking at a home loan application, they want consistency of income (before tax) for the last 2 years. This will be evidenced by your 2 years’ personal tax returns if you’re a sole trader or 2 years’ company tax returns if you’re operating as a company. Some lenders take the average of the last 2 years’ income (before tax). Other lenders will take the lower of the last 2 years’ income (before tax). Being able to demonstrate consistency of income will help build your case.
If the income from the most recent tax returns is trending downward, lenders may ask for your two most recent Business Activity Statements (BAS) and where BAS are not available, business transaction statements covering a minimum of 90 days (no older than 30 days at submission).
What if you only recently became self-employed?
Given that it is sometimes a bit of a challenge to provide all the paperwork you need to document your income, some lenders have worked out a different process for it – it’s called alternative documentation (Alt Doc for short). It is specially designed to meet the needs of self-employed or small business owners who can’t provide the income documentation required by traditional lenders and mortgage insurers but can still provide valid information, just with different types of paperwork.
Let’s say , you used to work as a plumber on PAYG. You started your own business and switched as a sole trader. Are there lenders who will provide you with a home loan? You definitely won’t fit within the parameters of most of the traditional lenders. But there are a few smaller lenders that will consider your financial situation. Your income can be verified by providing your 2 most recent BAS statements and 6 months worth of bank statements.
You need to have at least 6 months ABN and GST registered for 1 day. The longer you’ve had your ABN, the more competitive your interest rate will be.
What if you have not done your tax returns or your tax returns do not reflect the income of the business?
There are lenders that will accept an accountant’s letter for proof of income together with two most recent BAS statements and 6 months bank statements. These kinds of loans are referred to as Alt Doc loans. Interest rates are higher beginning in the 3’s and 4’s.
These are just some ideas to help your loan application planning. There are many options for self-employed people who are looking to get a home loan but haven’t been successful with the traditional banks.
If you’d like more information, talk to us today about how we may be able to put you in touch with a lender that can help if the major banks have said ‘no’ to your loan application.
CBA recently announced a simplified process of providing documents for self-employed customers. They will now be assessed against the salaries that they pay themselves from their business, with six months’ worth payslips and a letter from their accountant now an option to help clients get a home loan.
This article is for general information only and should not be considered personal financial advice. Before making a financial decision, you should seek independent advice from a mortgage broker, financial planner or an accountant.
Maria Papa is a senior 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 firstname.lastname@example.org.