Home loan for self-employed possible?

Any general questions you might have in regards to loans and finance.
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dean
Posts: 37
Joined: Thu Jun 20, 2013 6:08 pm

Home loan for self-employed possible?

Post by dean »

Hi brokers, I am planning to buy a house in a few months and I was wondering whether or not I will qualify for a home loan. The thing is I don’t have a ‘job’ as such; instead I own an auto repair workshop. A friend of mine was telling me that banks are really hesitant to give loans to self-employed applicants. I am not sure why this would be a problem for banks. Can you tell me if this is really the case?

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Otto Dargan
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Re: Home loan for self-employed possible?

Post by Otto Dargan »

Hi and welcome to the forums dean,

Lenders may be hesitant to give out loans to self-employed borrowers because their income is not as stable and it may represent a higher risk to the lenders. In such case, lenders will want to look at your past tax returns so they can predict how stable your business is likely to be in the future. If it shows that your income has increased or decreased by a large amount in the last two years then banks and non-bank lenders may become very wary.

Lenders may assess your income in one of the following ways:
  • Use the lowest of the income figures for the last two years.
  • Use the most recent year’s income as shown on your tax return.
  • Average the two years income or take 120% of the lowest year’s income.
Based on this, the lenders may or may not then add back expenses shown on your returns. To verify your income, you may have to show one of the following documents:
  • BAS statements for twelve months showing a high turnover.
  • An accountant’s letter verifying your income.
  • Business bank statements showing a high turnover.
  • Old tax returns from over 24 months.
  • Interim financial statements.
If you cannot prove your income at all then you can consider applying for a no doc loan. This is only available for loans that are not regulated by the NCCP act. You will be required to sign a declaration confirming your income and you may be charged Lenders Mortgage Insurance (LMI) for loans over 60% of the property value.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

dean
Posts: 37
Joined: Thu Jun 20, 2013 6:08 pm

Re: Home loan for self-employed possible?

Post by dean »

Okay. What do you mean by “add back expenses”? How will this affect my income?

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Otto Dargan
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Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
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Re: Home loan for self-employed possible?

Post by Otto Dargan »

Hi dean,

Some lenders may add back any expenses that are not cash expenses or ongoing commitments however were previously deducted to lower your taxable income. This is because your taxable income alone isn’t the same as your actual income that you can use to pay your commitments such as the repayments for the new loan.

Adding back expenses allows you to increase your assessable income and your borrowing power. Some examples of add backs are:
  • Depreciation: Even though depreciation is a tax deduction, it is not a day to day expense. This is why some lenders add it back to your taxable income.
  • Additional superannuation: Any lump sum contributions to super in excess of your minimum requirements can be added back.
  • Net Profit Before Tax (NPBT): If you own a company then profits retained back in your company can be added back. If you don’t own the entire company then lenders will assess your share of the net profit.
  • One off expenses: Extraordinary expenses may be added back if you can provide an accountant letter to confirm this.
  • Rental property expenses: Depreciation on your properties, management fees, repairs and other rental property deductions such as negative gearing may all be added back.
  • Company car: The expenses associated with the car used by your business and yourself may not be added back, however in some cases they may add in an extra $3,000 to $6,000 in income.
  • Trust distributions: If your business is in a discretionary trust and income are distributed to some of your family members then in most cases this can be added back. Many lenders may not accept this add back or may only do so if you provide a letter from your accountant to confirm that the beneficiaries are not financially dependent on this income.
You can either call us on 1300 889 743 or fill in our free assessment form to find out if you qualify for a loan or not.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

dean
Posts: 37
Joined: Thu Jun 20, 2013 6:08 pm

Re: Home loan for self-employed possible?

Post by dean »

Thanks for your help, Otto. I shall call you up in the next few days. Bye!

airenwaren
Posts: 41
Joined: Thu Jun 27, 2013 9:21 pm

Re: Home loan for self-employed possible?

Post by airenwaren »

Hey Otto, I am also self-employed and I run my own handicraft shop. I have one concern and it is that I have only been running this shop for three months and so I won’t be able to show my annual income. Will the bank accept my application at all in such case?

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Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: Home loan for self-employed possible?

Post by Otto Dargan »

Hi airenwaren,

Most lenders will not lend to you if you have been self employed for less than one year. This is because they see new businesses as having more financial uncertainty and it is hard to prove your income since you do not have tax returns yet.

You may have another option to qualify for a home loan. You can apply for a low doc loan if you are unable to provide income evidence through traditional means. One of our lenders can look at your income from your last job and take that as a proof that you can afford the loan. You would however need to meet the following criteria for this:
  • Your business must be in the same line of work as your last job.
  • Your business must be less than 18 months old.
  • You must show that your business is currently trading.
  • Your business should ideally be in a service industry with low expenses.
  • You must be borrowing less than 80% of the property value.
Lenders look at your previous job as a way to verify your income because they feel if you are already experienced in this line of work and if you decided to close your business then you could always go back to working for someone else on a similar salary. On that basis, you may be able to borrow up to 80% of the property value.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

airenwaren
Posts: 41
Joined: Thu Jun 27, 2013 9:21 pm

Re: Home loan for self-employed possible?

Post by airenwaren »

Well, I did use to work in a company that sold home décor products. I also think the other criteria matches up. Hopefully I will have my loan approved. I will ring you up in a few days to know if this is possible.

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