Self-employed home loans – what do you need to know?

If you’re a self-employed borrower seeking a home loan, there are options for you on the market, but you may need to jump through more hoops than a standard borrower. Here are some important things you need to know.

When you apply for a home loan, you will need to show the lender proof of your financial status, including your income. For many people, this proof is available in the form of Pay As You Go (PAYG) payslips, but sole traders, freelancers and other people who run their own business may not have the same level of documentation. It’s for this reason that financial institutions may require self-employed people to provide other forms of proof, limit the types of loans available to them and apply stricter lending criteria than required for other borrowers.

Can you get a home loan if you are self-employed?

Yes, you can get a home loan if you are self-employed, but the lending criteria might be more strict. Lenders will want to find out as much information about a borrower’s finances as possible, to establish their income, savings, assets and capacity to pay back a loan. They are also likely to consider your business’ financial position.

They may take into account the length of time you have owned your business, and its performance over time. For example, if you have only been self-employed for one year, banks and lenders may consider you a riskier prospect than someone who has been running their own business and earning a stable income from it for several years.

Generally speaking, the riskier a bank or lender perceives a borrower to be, the more hesitant they might be to approve a home loan application, or the more strict the conditions they might impose, such asking for a higher deposit. Some lenders also have specific home loans for self-employed borrowers.

What kind of documents do you need to apply for a self-employed home loan?

Every lender will have their own criteria for what they require from a home loan applicant, and there are some things that lenders will typically always want to see, such as ID documents and information about your assets and liabilities. If you are self-employed and applying for a home loan, however, there are some things that lenders will likely ask for in order to give them an idea of your financial position. These could include:

• One to two years’ worth of business tax returns
• Two years’ worth of personal tax returns
• Your most recent notice of assessment from the Australian Tax Office (ATO)
• Two years’ worth of bank and financial statements from your business.

If your business is less than two years old or if you do not have this documentation, you may also be asked to provide such things as:

• Proof of ABN and GST registration for your business
• Six to 12 months’ worth of Business Activity Statements (BAS)
• Tax returns older than two years
• A letter from an accountant who has knowledge of your circumstances, verifying your financial position.

What are low doc and full doc home loans?

Different types of loans require different kinds of documentation:

• a ‘full doc’ or full documentation loan is one in which a borrower would provide a standard amount of supporting documents as evidence of their income
• a ‘low doc’ or low documentation loan is one that might be geared towards someone such as a self-employed person, who cannot provide standard documents such as PAYG payslips.

One key difference between the two types of loans may be the interest rate. Generally speaking, loan types that require less documentation than others for approval purposes are seen as being a higher risk loan. This higher risk usually means that a higher interest rate would be applied to that type of loan.

For this reason, low doc home loans, which may be one option you’re considering if you’re self-employed, may come with higher interest rates attached than full doc ones.

Explore: Low doc personal loans for the self-employed

What are some things to be wary of when applying for a self-employed home loan?

When applying for a home loan as a self-employed borrower, there are some things to be wary of, including that not every lender may do business with self-employed borrowers, and, if you are successful in your loan application, you may find that you are offered a loan type with a higher interest rate or lower LVR than a standard borrower.

Smaller array of lenders

While many home lenders, including major banks, will lend to self-employed borrowers, it may not always be the case. This may mean that the range of options open to you for a home loan is slightly more limited than if you were applying for a home loan with PAYG payslips as evidence of income.

Higher interest rates

Generally speaking, lenders may only allow certain types of borrowers to apply for certain loan products.  If you are self-employed, you may only be able to apply for loans with a higher interest rate, which would mean that you would pay more in the long term for your home loan. It is not always the case that lenders do this, however, and some, including major banks, will offer the same loans to self-employed borrowers as standard ones.

Higher deposit requirement

The loan-to-value ratio (LVR) of a home loan is the proportion of the purchase price of a property that a lender is willing to approve for a borrower. The lower the LVR of a loan, the larger a deposit the buyer will need – say a lender is willing to offer you a loan with a 70% LVR, that would mean you would need a 30% deposit saved up to purchase the property.

Much as lenders may offer loan types that have a higher interest rate to borrowers they perceive as risky, they may also only be willing to offer self-employed buyers a loan with a lower LVR, depending on their assessment of the borrower’s financial situation. You may likewise be asked to pay lender’s mortgage insurance (LMI).

Has COVID-19 made it harder to get a self-employed home loan?

The COVID-19 pandemic has had a significant impact on the Australian economy, and the financial fallout has been felt by small businesses and self-employed people. In recognition of this, some banks have put in place specific measures to help ease the approval process.

For example, at the time of writing, CommBank has a procedure in place wherein business customers, who are normally required to provide two years’ worth of financial statements for their business, are able to provide a 2019 financial statement in place of a 2020 one.

CommBank will also ask to see recent business activity statements as part of the home loan application process. If your recent statements show an upturn in business that is in line with 2019 levels, this may be seen as evidence that your business is returning to normal.

If you are a self-employed home loan borrower whose business has been affected by COVID-19, it may be wise to inquire as to whether your chosen bank or lender has any similar measures in place, and what documentation you may be able to provide.

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