You could get a home loan when you’re self-employed if you can prove sufficient income to repay the loan and meet the other eligibility criteria. However, you may have to apply for a low doc home loan depending on how long you’ve been self-employed.
Full doc or low doc: What you need to know about self-employed home loans?
You may qualify for a traditional home loan (also called a full doc home loan) if you can provide the lender with sufficient proof of your earnings and experience.
If you’ve been running your business successfully for two years or more, you could provide the lender with your tax returns and financial statements to help them estimate your annual income for a full doc home loan. The lender might also ask for your bank statements to check if you have adequate savings to put down a deposit for your home.
Here’s what you’ll typically need to provide to prove your income as a self-employed individual for a traditional home loan:
- Your ABN number and GST registration
- Company tax returns for the last two years
- Financial statements, such as your company’s profit and loss statement
- Your personal tax returns
- Personal and business bank statements
In case you don’t have the necessary documentation or you’ve been self-employed for less than two years, you may need to apply for a low doc home loan. These loans are typically offered to borrowers who don’t have the usual documentation to prove their income, such as payslips or full two years of tax returns and financial statements. This may include small business owners, contractual workers, freelancers, sole traders and casual workers.
As their name goes, low doc home loans generally require you to provide less documentation to prove your eligibility than traditional home loans. But the lender still needs sufficient proof that you’ll be able to service the loan. The exact documentation you’ll need may differ from lender to lender, but you’ll typically need to provide some of the following documents:
- A signed Borrower’s Income Declaration stating your income
- Your Business Activity Statements (BAS)
- Personal tax returns
- Financial statements
- Personal and business bank statements
- An accountant’s letter verifying your financial position
It’s important to remember that low doc loans are different from bad credit home loans. Low doc loans are available to people who have sufficient income and a good credit score but can’t provide the usual documentation to qualify for a traditional home loan. If you have bad credit on your file, you may not be eligible for a low document home loan. Consider speaking to a mortgage broker to find out about your home loan options if you have bad credit on your file.
How much can you borrow for a house as a self-employed borrower?
How much of the purchase price you can borrow for a house depends on several factors, including the type of home loan you are eligible for.
If you are eligible for a traditional home loan, you can borrow up to 80% of the property’s price by putting down a 20% deposit. Some lenders might even allow you to borrow more than 80% of the property’s price if you agree to pay for Lender’s Mortgage Insurance. The percentage of the property’s value you can borrow with a low doc loan is usually lesser than a traditional or full doc home loan.
A low doc home loan generally allows you to borrow up to 60% of the property’s price, meaning you could have to provide as much as 40% of the purchase price upfront. Some lenders may allow you to borrow a little more, but you’ll most likely need more than a 20% deposit to qualify. A low doc home loan might also charge a higher interest rate than traditional financial products. Having a high credit score and clean credit history could help you negotiate better and increase the number of options available to you.
Is it difficult to get a home loan when you’re self-employed?
Even though it’s possible to get a home loan when you’re self-employed, you might find the process a little more strict or challenging than for someone with a salaried income. This is not to say that banks are biased against workers in the gig economy. However, the existing risk assessment processes automatically categorise someone with an unsure income as more of a risk – raising a red flag for lenders. But you can increase your chances of approval by providing the lender with the documents they need to verify your income.
Having experience and expertise in your field can also help your application. It gives lenders the confidence you’ll be able to repay the loan as you could return to regular employment if your self-employment doesn’t last for some reason.
If you’re unsure about your home loan eligibility, you may want to discuss your situation with an expert, such as a mortgage broker. A broker can help you better understand your finances and guide you to the right mortgage product for you. They can also help by informing you about the documents you need to provide for a mortgage and how to get them ready for a successful loan application.
