There’s no doubt there are a lot of perks of being your own boss. But alongside the many benefits come additional challenges, especially when it comes to borrowing money.
You’ll often find it harder to get a home loan than if you were a ‘regular’ borrower. But while it might be harder, it’s definitely not impossible.
Why you’ll often run into trouble if you’re self-employed
Lenders want to know how likely it is that a borrower can repay a loan before they’ll approve the application. To help them decide this, they’ll want to verify your income. While this is an easy task when you’ve got payslips handy, it can pose difficulties when you’re self-employed.
To qualify for a standard home loan, you’ll have to provide business financial documentation such as:
- Your last two years’ individual and business tax returns
- An Australian Business Number (ABN) registered for 24 months
- Business activity statements (BAS) for 12 months showing a steady and consistent cashflow
- Business bank statements
- Interim financial statements
This might not be paperwork you’ve got easily on hand, or what you do have might not conform with the lender’s guidelines.
That said, many lenders are willing to give mortgages to self-employed borrowers who don’t have the required documents for a standard home loan. They’ll offer something known as ‘alt-doc’ loans which allow you to verify your income through alternative methods.
How do you qualify for an alt-doc loan?
Alt-doc loans are designed for borrowers who have the ability to repay a home loan but might not tick all the boxes when it comes to proving it. Different lenders have different qualifying criteria, but the sort of documentation you might be asked to provide may include:
- ABN-registered for 24 months PLUS
- GST-registered for 12 months with six months of business bank statements OR
- Six months BAS with a declaration of your income
This documentation will need to show your business is profitable and that your income is high enough to demonstrate you can meet your loan repayments without hardship. That’s because lenders have a legal duty to lend responsibly.
Alt-doc loans are often considered riskier by lenders, so can attract higher interest rates and fees than standard mortgages.
How to increase your chances of qualifying
If you’re self-employed and looking to strengthen your chances of being approved for a home loan, here are some things you can do:
- Keep good financial records – as the more proof you have of your income the better
- Be fully transparent with your lender – especially if your income fluctuates from year to year
- Save money regularly – to show you’re financially responsible with money
- Pay your bills and debts on time – as this may help you improve your credit score
- Cut back on unnecessary living expenses – as these can impact your chances of approval.
Looking for a loan?
If you’re self-employed and having troubles with other lenders, a lender like Pepper Money may be just what you’re looking for.