Self-Employed? Here’s How to Secure a Home Loan Australia
Self-employed individuals usually assume that obtaining a mortgage would be much harder than salaried workers. And while this is true in some cases, it is by no means an impossible task. It just means that due to the irregular income streams, you would have to verify income and creditworthiness more so than the standard client.
Lenders are generally risk-averse; they will view a self-employed individual riskier because a business’ revenue goes through ebbs and flows. Banks might look at salaried workers in a better disposition as they have a more straightforward income stream. That said as Australian small businesses employ so many people, lenders have many tools to gain insight into credit worthiness of the self employed sector.
So how exactly should a self-employed borrower apply for a mortgage? Here are the essentials to make your application smooth and successful.
Home Loans for Self-Employed
It’s a common misconception that obtaining a mortgage is inherently more difficult for self-employed applicants. In reality, the basic criteria for home loans are consistent regardless of your employment nature.
If you show a strong credit history, sufficient liquid assets, and a history of stable income streams, you will be able to get a home loan.
What is challenging for self-employed clients is how to demonstrate their income. Tax deductions and write-offs utilised by self-employed individuals can lead to a low net income on tax returns, which can affect mortgage qualification. Showing a low net income or even a loss on tax returns means making mortgage an even tougher climb.
To navigate the mortgage application process when you are self-employed, consider these important steps:
Determine Self-Employment Status: You’ll typically be considered self-employed if you own a business, have a partnership, or receive income verified by 1099 forms. Self-employed applicants with a 25 percent or greater share in a business or partnership are usually classified as self-employed.
Prepare a Business Explanation: While a full business plan isn’t mandatory, providing documents that showcase the health of your industry and the demand for your services can bolster your application. This might include supply reports, tax returns indicating revenue growth, and professional websites that demonstrate your industry expertise and success.
Gather Necessary Documentation: Be prepared to provide additional income documents due to your non-traditional income structure. This could include business licenses, proof of business insurance, articles of incorporation or partnership agreements, and other relevant permits.
Shop Multiple Lenders: Seek out loan officers experienced with self-employment mortgages, as they can advocate on your behalf. Mortgage brokers can also guide you to lenders specializing in self-employment mortgages.
Consider Non-Qualified Mortgages: Non-qualified mortgages (non-QM) offer looser income verification criteria, making them suitable for self-employed individuals. These mortgages consider alternative factors, such as average bank statement balances, as indicators of creditworthiness. However, be prepared for higher interest rates and additional closing costs when opting for non-QM mortgages.
What Home Loans are Available for Self-Employed Clients?
While self-employed borrowers are eligible for all types of mortgage, some mortgage types may be more suitable for you than others. Here are the options:
Fannie Mae and Freddie Mac Loans – These traditional conforming loans have strict approval requirements and require a 20% down payment. This type of loan may not suit most self-employed people, but if you are at least 5 years in in the same business, you may have a bigger chance.
FHA Loans – FHA loans are products guaranteed by the Federal Housing Administration. Down payment is much lower at 3.5%, with the government backing the rest of the loan.
VA Loans – VA loans are available to both current and former members of active-duty service. Eligible borrowers can have 100% guarantee of the loan, which means zero downpayment to secure the home.
Non-conforming Loans – Non-conforming or specialist loans are suitable for borrowers who don’t meet the criteria for traditional home loans due to credit issues, irregular income, or unique financial circumstances. While these loans can be more flexible, they often come with higher interest rates and less favourable terms than a conventional loan.
Guarantor Loans – Self-employed borrowers who may not meet the lending criteria or have the deposit can consider a guarantor loan. This involves a family member using their respective property as security for the home loan.
Considering a home loan as a self-employed individual means going through the same processes as a conventional home loan but doubling down on ensuring creditworthiness and having a good income. It’s essential to assess your financial situation, consult with mortgage brokers experienced in self-employed mortgage application, and explore tailored options from both bank and non-bank providers.
