Applying for a home loan if you’re self-employed may seem daunting. The uncertainty of COVID-19 has made it even more difficult to assess its impact on your financial statements. If you’re self-employed or you own your own business, the challenges of admin – keeping your accounts, finances and income flow all on track is exacerbated by the impact of COVID-19 on your business.
It’s not easy to purchase a home as prices continue to rise. It’s not easy for first home buyers who struggle to save for a deposit. It’s not easy to apply for a loan with the amount of documentation required to prove your income. The last thing you need is a ‘no’ on your home loan application because of the paperwork.
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’s self-employed to help get their home loan sorted.
What paperwork should you provide?
Under a company structure, self-employed people applying for a home loan need to provide the following as the most 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.
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’ tax returns if you’re a sole trader or 2 years’ company tax returns and 2 years’ personal 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 last two Business Activity Statements (BAS) and where BAS are not available, business transaction statements covering minimum 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 does 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. This kind of loans are referred to as Alt Doc loans. Interest rates are higher beginning in the 3’s and 4’s.
These are 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.