Self-employed borrowers often face the challenge of not being able to provide traditional payslips and tax returns to support their loan applications, but this doesn’t have to stop you from buying your dream home.
Many lenders offer low-documentation (lo-doc) loans for self-employed borrowers who don’t have standard employment records. Instead of payslips, borrowers may prove their ability to service a loan using bank statements, accountant declarations and financial records.
Like any mortgage application, lenders still need proof that your income exceeds your expenses and that you can comfortably service the loan. Preparing properly can take anywhere from six to twelve months.
Reduce Debt
Pay down credit cards and personal loans wherever possible and reduce the credit limits once they are paid off.
Lenders assess the total credit available to you as a potential debt level, not just the amount you currently owe.
Speak to a Finance Broker
A finance broker can help explain how your business structure and taxable income may impact your borrowing capacity.
Brokers also have access to specialist lenders who assess applications on a case-by-case basis and offer products specifically designed for self-employed borrowers and contractors.
Traditional bank lenders may not offer the same flexibility.
Stay on Top of Your Taxes
Make sure your tax returns are lodged on time and that all tax obligations are paid promptly.
Keeping your financial records organised demonstrates financial responsibility to lenders.
Build Your Savings
Saving a deposit is important, but lenders also want to see that you can consistently manage your money and live within your means.
Ideally, you should be able to show at least six months of strong savings history and controlled spending habits.
Understanding Low-Documentation Loans
Low-documentation loans differ slightly from standard home loans. Because lenders take on more risk when lending to self-employed borrowers, these loans often come with slightly higher interest rates and stricter lending conditions.
Generally, interest rates for lo-doc loans may be one to two percentage points higher than full- documentation loans.
Most lenders will also require a loan-to-value ratio (LVR) of no more than 80%, meaning they will not lend more than 80% of the property’s assessed value.
In some cases, if the loan amount exceeds 60% of the property value, lenders may also require borrowers to pay Lenders Mortgage Insurance (LMI).
