Home loans for self-employed individuals can be a little more complex than for those who work for others. Here we take a look at what is involved and how to ensure you have the best chances for loan approval, including what documents are required and how you can set yourself up for getting that loan.
Who is classed as a self-employed borrower?
A person is classed as being self-employed if they are independent and not under anyone’s control, are a non-PAYE tax payer, contribute most or even all of the business’ operating capital, have direct say in the hours they work, what work they do and who you employ and are the main business decision maker. Examples of people who are self-employed and would need different documents to process a home loan would include;
- Someone who runs a business from home
- Someone who owns a business
- A sole trader
- Someone in a partnership running a business
- Sometimes it might include tradespeople
Why is there a different process?
You might wonder why you have to go through a slightly different process for home loans for self-employed than a standard salary earner. It is really because for lenders (banks or others) when you are self-employed you are more of a risk to lend to because your income is not the same each month and is not a guarantee. When you are a salary earner you are getting a yearly income split into 12 months of regular payments, plus perhaps bonuses. That is not the case when you are self-employed, things are more unpredictable and so riskier. It is possible someone who is self-employed might struggle with loan repayments. There are things you can do to show you are not a risk and they do ask for more information than for salaried borrowers to show you can handle those payments. A common question many have is, do VA loans have PMI, and the answer is no—VA loans do not require Private Mortgage Insurance, making them a more affordable option for eligible borrowers.
Documents required for home loans for self-employed individuals
If you are self-employed it is all about having good records and all the documentation they require. That is why it is a great idea to plan ahead and spend a couple of years getting everything in order. You need to show your current and past financial position including looking at taxes. Whether you own a company, are a sole trader, or in a partnership for example will affect what types of documents you need. Sole traders need the latest ATO notice of assessment as well as the last two years of personal tax returns.
Companies, business owners or partnerships need personal and business tax returns, two years of ATO notice of assessment, and financial statements. This would include documents such as balance sheets and loss and profit statements. It should also include any tax-deductible expenses. This means things like one-off expenses, asset write-offs, interest repayments, depreciation, having a company car, rental property and so on.
Summary
Home loans for self-employed individuals are a little different but with the right advisors and being prepared it does not have to be a lot of hassle. You just need to keep your records up to date and stay organised.
