Self Employed Loans
While it may take a little more paperwork and planning to arrange self-employed home loans, you are not alone, and there are services available in order for you to obtain a mortgage.
Self-employed people can find the mortgage process more difficult to navigate than those in traditional employment.
The self-employed often have a changing clientele and no regular revenue, so when mortgage lenders assess income as part of the initial approval process, the applicant has more work to do to prove they will be able to make repayments.
Usually, mortgage applicants have a regular income they can easily show to lenders to secure a loan, but entrepreneurs, small business owners and freelance professionals will have to use tax returns, contracts and financial statements as proof of income.
According to Independent Contractors Australia (ICA), 17.2 per cent of Australians in the workforce were self-employed in 2012, which equates to nearly two million workers in this situation.Book a FREE appointment with a professional mortgage broker now!
Lenders may require tax returns and quarterly profit and loss statements as proof of income, regardless of whether you have a good credit history or a portfolio of assets.
Building up these portfolios for lenders to assess can take time. Usually a minimum of two years of self-employment with appropriate documentation is required for a mortgage application, although if you can provide a longer history, you will be in a better place to apply for a loan.
Lending institutions will consider the debt-to-income ratio, preferring the figure to be around the 40 per cent mark. However if you have compensating factors such as a solid history of revenue and contracts, then they you may qualify for a mortgage with a ratio of up to 45 per cent.
Tax and your mortgage
One thing you will need to be aware of as a self-employed worker is how deducting business expenses can affect your mortgage application.
As tax returns are a large part of your application, any expenses deducted from your income for tax purposes can be detrimental to your mortgage limit by lowering your income.
Refinancing while self-employed
If you already have a mortgage, but are self-employed, your current assets will help you to refinance.
Lenders will still consider your revenues, but home equity will help you to obtain a refinanced mortgage.
Many lenders will require you to have cash reserves when you apply for a mortgage as a self-employed worker.
The rules will vary between lending institutions, but generally you will need a minimum of two months worth of housing payments for principals, interest, taxes and insurance.
This is in case of an emergency or situation where your income falters.
If you’re thinking about applying for a self-employed home loan, you can take a few steps to get you started.
Paying down debt will help with your debt-service ratio and help you to maintain a good credit rating.
You could also consider having someone co-sign your loan. This will give them title ownership of the property as well, but if you have issues with the application on your own then co-ownership may help you get into a home sooner.
Start collecting together your documentation. The more tax notices you have the better, financial statements will prove you have a steady cash flow, and historic and current contracts will demonstrate revenue streams.
The ICA believes that there will likely be a growing number of self-employed Australians as the population grows and there are more workers in the workforce who prefer to control their own employment.
If this is you, give AAA Mortgage Solutions a call on 1300 555 888 to talk about any concerns or queries.