Self Employed home loans: How to get the best mortgage if you are self employed
What are acceptable purposes for self-employed (including lo doc) loans?
- Purchase or refinance you owner occupier home
- Purchase or refinance your Investment loan
- Business cash flow requirements
- Home renovations
- Construction loan
- New vehicle
- Any other worthwhile purpose
Are low doc home loans the best option for self-employed people?
Low doc home loans (aka lo doc loans) are often sold to self-employed people as the best option for them to get a home loan. However, there are other home loan options for self-employed people that could be a better option.
Why are low doc loans promoted by some banks?
Low doc home loans are often promoted by some lenders because:
- they are cheaper for the lender to process; and
- they incur a higher interest rate (to compensate for the unknown and potentially higher risk from lending to someone that the lender knows less about their ability to repay the loan).
Why are low doc loans promoted by some bank sales staff and mortgage brokers?
Some bank sales staff and lazy brokers promote low doc home loans because:
- they are easier for if they don’t understand financial statements; and
- they are quicker to submit than full doc loans for self-employed people (some sales staff and some brokers are lazy).
When will a low doc home loan be the best option?
A low doc home loan can be the best option when you are unable to supply the required paper work required to demonstrate your income to the lender. In this case the lender will not accept a full doc application as you don’t meet the requirements.
Other scenarios can be where your business financials not reflecting the full story of your income or your business shows fluctuating annual income.
With a low doc loan you can declare what your income is by completing an income declaration form. This may help you to be able to borrow at a time of the financial year where you haven’t completed all your financial statements. Low doc loans can also be a good option for those that have only been self-employed for a short time.
What is the difference between a self-employed and Pay-As-You-Go (PAYG) employee home loan application?
PAYG employee’s income is easier to assess than self-employed people’s income. PAYG employees’ incomes are generally based on a set salary amount, with commissions, overtime and allowances. This can be demonstrated by payslips.
Self-employed people have more complicated financial situations. The lender will assess their income from a profit and loss statements. Often the documentation can be up to 2 years old at the time of the loan application. Furthermore, the profitability of the business could have changed from the time of the documented income.
How to get a self-employed home loan without using a loc doc loan?
- Have up to date financial statements for the last two years including income tax returns and notice of assessments.
- Use a good mortgage broker who understand self-employed home loans and not just the low doc variety! They can help you with the following:
- Bank policies vary, when assessing your income some banks will use the average of the last two year, other the latest year and some the lower of the two years. This can impact of your borrowing power.
- Maximise your add backs. When your accountant submits your tax return they will try to make your taxable income as low as possible to that you avoid tax. When you are submitting your loan application you want to maximise income and your ability to repay the loan. How does this work? Some lender allow certain things to be added back into your income for assessing your loan. For example your: depreciation, Interest expense that is being refinanced or no longer exists, car allowance, excess superannuation contributions, non-recurring expenses & non-cash expenses.
See more here at Oak Laurel