Home loans for self-employed borrowers

Just because you're a self-employed borrower doesn't mean you can't get a competitive home loan. You'll just need to provide more evidence to the lender to establish your income, such as tax returns and business activity statements.

If this is difficult for you to establish (if you've recently started your business, for example), then you may have to look at another option: using an alternative or low doc loan.

Explaining mortgage terms: Self-employed, full doc and low doc

Before we dig into the topic of home loans for self-employed borrowers it's a good idea to explain some confusing terms.

• Self-employed borrower. If you run your own business as a sole trader, work as a freelancer or have multiple jobs, you are self-employed. In other words, you receive irregular income from a business you run or through work you do for multiple clients. You do not earn a stable, steady monthly salary.
• PAYG borrower. PAYG means pay as you go. This means you work for a company that pays you a regular salary. Your employer deducts your monthly tax obligations automatically. This is the opposite of a self-employed borrower. PAYG borrowers have an easier time getting a home loan application approved because they have regular pay slips to establish their income.
• Full doc loan. A full doc, or full documentation loan, is the standard mortgage a PAYG borrower would apply for. If self-employed borrowers have 2 years of tax returns and other documentation, they may qualify for a full doc loan too. These loans usually have the lowest interest rates.
• Low or alt doc loan. For borrowers who don't have enough paperwork to establish their income for a full doc loan, alt or low documentation loans exist as an alternative. Lenders offering these loans may accept just 1 year of tax returns, a business activity statement for the last year, or a letter from an accountant.

Can I get a low doc or full doc home loan?

The answer really comes down to what kind of documentation you can use to establish your income. While this varies from lender to lender, here's a basic outline of the different home loan paperwork required for full or low doc borrowers.

Keep in mind that every lender has its own specific criteria, especially when it comes to self-employed borrowers. It's often a good idea to check a lender's requirements before you start getting a full application together.

Before you even start looking at loans as a self-employed borrower, consider speaking with a mortgage broker. A qualified professional can guide you through the mortgage selection process and will have a good idea of what loan type you need and the types of lenders that can help you.

Finder survey: What do Australians of different ages think are the most important features when considering a home loan?

What loans are available to self-employed borrowers?

Sole traders and other self-employed borrowers can access the same type of loans as full doc borrowers. And there is often a similar loan for alt or low doc borrowers too (although rates will be higher). Common home loan types are:

• Variable rate loans: Flexible loans that are attached to a variable interest rate.
• Fixed rate loans: Loans with fixed interest rates for a set period of time, usually 1-5 years.
• Construction loans: Designed to help you minimise your repayments when building a property.
• Lines of credit: Also known as a home equity loan, these allow you to borrow money using the equity in your property.

Am I better off with a low doc home loan?

If you have enough documentation to get a full doc loan, this will save you money because the interest rate will be lower. But if a low doc loan is your only option that's okay. Just be aware of the potential disadvantages before you sign a home loan contract, and weigh these against the benefits.

What documents do self-employed borrowers need

We covered this in brief above, but here's a more detailed list of the home loan documents lenders will ask you for. But it does vary widely by lender.

The level of documentation you need to submit with an application for a self-employed home loan can vary widely between different lenders. However, here's a guide to help you work out what you might need:

• Income verification. Big banks will ask that self-employed borrowers provide 2 full years' worth of financial statements, including tax returns, profit and loss statements and often the last 2 or 3 business activity statements as well. If you have other income such as investment income, you may also be asked to provide this. However, there are low doc lenders available that may only ask for your last 3 or 4 business activity statements and little else. Some lenders are happy for you to self-certify your income. This is where you sign a certification that you do earn sufficient income to comfortably afford the repayments on the loan amount you're applying for.
• Asset verification. When banks consider low doc home loan applications, they do assess what level of equity and assets you have available. For this reason, some lenders may ask you to provide copies of your council rates notice, showing a capital value for your property. You may also be required to show bank statements to verify savings and copies of any other investments you might hold.
• Credit history verification. Some lenders will ask to see the past 3 months of statements for your credit cards, transaction accounts and statements showing timely mortgage repayments. This gives them an idea of how much money is flowing through your accounts and how you're handling your financial obligations as a self-employed borrower.
• Contract of Sale. If you're purchasing a home, you will need to provide a copy of a signed, fully executed Contract of Sale for the property.
• Refinancing. If you are refinancing an existing mortgage over to a new lender, you may be asked for 12 months' worth of home loan statements to show that you're meeting your payment obligations. If you're consolidating other debts into your mortgage, such as personal loans or credit cards, you'll need to include statements for these too.

More questions about home loans for self-employed borrowers

• How long do I need to be self-employed for?

  The majority of low doc lenders will ask that your ABN has been registered for at least 2 years. They may also require that you're registered for GST. Of course, there are still some lenders around that will accept applications from self-employed people who have only been in business for between 1 and 2 years. The bank will generally want to see records from your accountant outlining your income and expenses, and they may want to see evidence of your income prior to starting your new business.

• What if I've been self-employed for under a year?

  There aren't as many lenders around that will approve a self-employed home loan application if you've been in business for less than 12 months, but it's not impossible to get a home loan. For example, if you've been self-employed as a sub-contractor electrician, but you were employed in the same line of work for someone else for 5 years before that, you could still be considered simply because you're still doing the same work. It may also help you gain loan approval if you're applying for the loan together with a PAYG regular income earner.

• How do lenders calculate my income?

  When you provide a full set of financial documents to your lender, it doesn't just look at the most recent years' taxable income. Most will add together 2 years' income and then average them out to give them a figure to work on. This can often reduce your actual income, which also reduces the amount you can borrow. Other lenders may decide to take the lower figure of the 2 years and run with this.

  Of course, there are some lenders that will actively try to add back some of the write-offs shown in your tax returns onto your taxable income figure. This might include any depreciation on business vehicles or investment properties and even any additional superannuation contributions you made throughout those years. It might also include adding back any once-off losses noted.

• How much can I borrow on a low doc home loan?

  Most lenders limit the amount that you're able to borrow based on the property value and the amount of income they're able to verify for you. In most cases, low doc applications are limited to 60% of the property value, although many lenders will increase this up to 80% with a Lender's Mortgage Insurance charge added for any LVR over 60%.

• What can a low doc loan be used for?

  You are able to use a low doc home loan for personal use, such as buying a home to live in, constructing a new home, or refinancing an existing mortgage from another lender. You're also able to use it for investment or business use.