Low Doc business-loans

How to get a low doc home loan when you’re self-employed

The path to homeownership can seem different for self-employed individuals compared to traditional employees. While securing a low doc home loan might seem like a challenge, understanding the process and requirements can significantly increase your chances of succes

Why the Difference for Self-Employed Borrowers?

Lenders typically have stricter requirements for self-employed borrowers due to the perceived higher risk associated with fluctuating income. Historically, self-employed individuals have presented a higher default rate on loans compared to those with regular paychecks.

However, being self-employed doesn’t automatically disqualify you from obtaining a home loan. The key lies in demonstrating your financial stability and ability to consistently make repayments.

What Documents Will You Need?

The crucial factor in securing a low doc home loan as a self-employed borrower is providing strong evidence of your financial capability. Here’s what lenders typically look for:

  • Tax Returns: Consistency in your income is paramount. Partner with an accountant or broker to ensure your tax returns and financial statements are well-organized and reflect your business’s health. All tax returns must be lodged with the Australian Taxation Office (ATO).

  • Business Financial Statements: These documents, signed by your accountant, paint a clear picture of your business’s financial health. Look to include:

  • Balance sheets.
  • Profit and loss statements.

In specific situations, such as a recently established business (less than 12 months old), lenders might be flexible with documentation requirements. Discussing your circumstances and loan goals with a lending specialist can help determine the most suitable approach.

Understanding Scrutiny of Tax Returns

Lenders meticulously analyze tax returns to gain a comprehensive understanding of your financial situation. They will verify the accuracy of the information provided against what you submitted to the ATO.

Following verification, a thorough review of your income and expenses takes place. This includes examining add-backs, which are non-recurring expenses that reduce your taxable income but don’t reflect your actual income. Common add-backs that lenders might consider include:

  • One-off expenses.
  • Net Profits Before Tax (NPBT).
  • Interest on business or personal loans.
  • Depreciation on taxable assets.
  • Income distributed through a trust.

Calculating Your Income for Loan Eligibility

Lenders employ various methods to determine your income for loan eligibility. They primarily rely on your tax returns and any additional financial information you provide. Analysing your tax returns allows them to estimate your average income and project its future stability.

The lender might base their calculations on your lowest income figure or prioritize figures from your most recent tax return. In some cases, considering your entire self-employment history might be necessary to provide a more accurate picture of your income potential.

Recently Self-Employed? Here’s What You Can Do

Individuals who have been self-employed for less than two years might face greater difficulty securing a low doc home loan. Many lenders are hesitant to approve home loan applications from those with limited self-employment history.

There can be exceptions, though. Some lenders may consider applicants who have:

  • At least 12 months of trading in their current business.
  • Prior experience (two years or more) as a PAYG employee in a similar field.
  • A strong credit score.

If you fall short on the two-year requirement for tax returns and financial documents, contacting a lending specialist can help explore alternative solutions.

Boosting Your Chances of Approval

Here are some additional strategies to strengthen your low doc home loan application:

  • Increase Your Deposit: A larger deposit demonstrates financial responsibility and reduces risk for the lender. Ideally, aim for a 20% deposit or more of the property’s value. This can also eliminate the need for expensive Lender’s Mortgage Insurance (LMI).

  • Gather Proof of Assets: Compile bank statements showcasing at least six months of savings or term deposits. Consider including other assets like investments or rental properties. Existing property ownership allows you to leverage equity towards your down payment.

  • Maintain a Good Credit Score: A high credit score, both personal and business, significantly improves your chances of loan approval. Addressing any outstanding debts and consistently making timely payments can help improve your creditworthiness.

Owning a home as a self-employed individual requires extra preparation and effort compared to traditional employees. However, by understanding the process, gathering the necessary documentation, and demonstrating financial stability, you can successfully navigate the path to homeownership with a low doc home loan. Remember to consult with a lending specialist to discuss your specific circumstances and explore the most suitable loan options for your needs.