Applying for a loan as a self-employed person can be more complex than applying as someone with an employer. This is because lenders may perceive you as a riskier borrower as your income may not be as stable. However, if you have been operating your own business or contracting for two years with a relatively stable income, you may still put forward a strong application. If you have been self-employed for less than two years, you may still have options available.
Here we will look at what banks consider when looking at your application, and ways to strengthen it.
Verifying self employed income isn’t simple. Each lender sets its own rules on what it accepts and which documents you must provide to verify your application, and these requirements can vary widely between lenders or even across different products from the same lender. We would strongly recommend talking to us about your borrowing power as a starting point, but to ensure you are looking in the right territory, feel free to play with the calculator below to confirm your expected borrowing power.
What documents do I need to provide when self-employed?
The documents you need to submit are lender dependent, which helps them determine your average income and ability to repay the loan. If you are a sole trader, we collect your latest one-year personal tax return, your latest ATO notice of assessment and either a 12 months’ Business Activity Statements (BAS) or a second year’s tax return.
Lenders may also ask you to provide bank statements that show your saving habits. To complement this, you will also need to provide two forms of identification, one of which must include your current residential address.
The lender will want to know about your assets (such as cars), superannuation balance and investments (such as shares), as well as liabilities such as credit cards, loans or debts. You will also need to provide a breakdown of your regular expenses, including groceries, insurance premiums, utility bills, transport, entertainment, clothing, childcare, and subscriptions.
If you have already signed a contract to purchase a home, you will be required to provide the contract to the lender, and some may also require evidence you have taken out building insurance on the property.
What expenses do lenders consider?
Lenders consider your ongoing personal and business expenses when they determine whether you can comfortably make your repayments. They may add back one-off expenses – such as buying a car or making extra super contributions – because these costs don’t recur and won’t affect your future income. Your broker can speak with you about which expenses the lender may add back to increase your annual income.
Tips to strengthen your application
If you’re looking to apply for a home loan as a self-employed person, there are a few considerations that could help strengthen your application.
- Wait until your business has been operating for at least two years and you have been receiving a stable income.
- Provide documentation of tax write-offs, depreciation, superannuation contributions, interest repayments on loans and one-off purchases that the lender may add back to your income.
- It could help to provide information on your employment prior to becoming self-employed, including income, to demonstrate expertise or the potential to return to another job should your business experience troubles.
- Try to save at least a 20% deposit to show strong saving ability and avoid paying Lenders Mortgage Insurance (LMI).
- Check your credit report and ensure it is correct. If your credit score is low, consider ways to boost it prior to applying. Your broker can help you with this.
Another way to help strengthen your application for a loan is to have a broker on your side. A broker understands the requirements of different lenders, helping find the right solution for your needs.