Self Employed Borrowers – Low doc home loan options
Want the loan but can’t provide the financials because you are self employed? There are loans still available for you.
If you want a home loan, or any other financial product like a credit card or a personal loan, you're going to need to verify your financial details with the lender before you can access credit. For most of us, records of our employment and salary are obtained easily enough, but for the self-employed, showing business financials can be difficult.
A lender will want to know as much as they can about an applicant before they approve a loan for many hundreds of thousands, if not millions of dollars.They want to see information about how much you earn, whether you've been steadily employed or whether you have a history of making regular deposits into a savings account. This information helps a lender decide whether you're going to be able to service the loan now and into the future.
This is where the self-employed can run into trouble. Providing tax returns and financial statements can take time to organise and sometimes the information self-employed applicants have on hand doesn't fit with regular loan application guidelines. But that doesn't mean the self-employed can't get a loan. A low documentation (low-doc) loan is a product designed to cater to self-employed applicants.
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What is a low-doc home loan?
A low documentation home loan offers credit to people working for themselves, who otherwise wouldn't be able to meet the full documentation loan application requirements. As the name suggests, a low-doc loan is low on paperwork. Different lenders have different application requirements, but generally you'll only need to supply a signed Borrower Certificate of Income Declaration Form, Business Activity Statements (BAS) and tax returns (if you have them). Some will happily allow you to self-declare your business income and ask for no other forms of income verification besides checking that your Australian Business Number (ABN) or Australian Company Number (ACN) has been registered for more than two years and is also registered for GST. The GST requirement ensures that the business is profitable. Any self-employed sole trader or small business owner who is registered for GST must have a business turnover of at least $75,000. So, the bank already knows the income is there. It's just not being verified via financial statements or tax returns.
The majority of low-doc loans are limited to a slightly lower than normal loan to value ratio (LVR). This often means you'll need a larger deposit or higher amounts of equity to qualify. For instance a full documentation loan may have an LVR of 80%, whereas a low-doc loan will have an LVR of 60%. The LVR signifies the percentage of the loan you are allowed to borrow without having to pay lender's mortgage insurance.
Who is classified as self employed for a Low Doc Home Loan?
Any self-employed borrower who is unable to qualify for a traditional home loan can be classified as a low-doc borrower, some banks will also classify self-funded investors as low-doc borrowers too. A company or trust will also often consider a low-doc loan over a full-doc loan to reduce the paperwork involved in the loan application. Full-doc loans for a company or trust may require two full years of financial statements and tax returns for the borrowing entity, in addition to two full years of tax returns for the individual as well. In this case, opting for a low-doc mortgage can reduce the red tape involved in the application, but it's at the cost of a low-doc home loan premium.
Can I apply for a self-employed low doc loan?
Anyone can approach their regular bank and enquire about a self-employed low-doc loan. However, not all banks or lenders are responsive to these requests. Like all applications, there's no guarantee your request for credit is going to be accepted. A failed application will show up as an enquiry on your credit history. Lenders see multiple enquiries in a short space of time as a troubling sign.
This is where it's important to discuss your specific needs with a mortgage broker, preferably one who is experienced in dealing with self-employed borrowers. A good broker will know which lending institutions are most likely to be lenient with low-doc loans and which institutions to steer clear from. They'll also know which lenders will allow you to self-declare your income and which ones may still want to see limited amounts of paperwork and documentation to verify your income.
Of course, there are still some non-conforming lenders that will allow you to apply for low-doc mortgages, even if your ABN has been registered for less than the usual two years. A good mortgage broker will know which lenders can overlook this requirement.
What are the loans available to a self-employed borrower?
Self employed borrowers can get access to the same type of loans that are available to full-doc borrowers. These can include:
- Variable Rate
- Fixed Rate
- Construction Loans
- Line of Credit
Pros and cons of self-employed home loans
As with any mortgage, there are some very definite pros and cons with self-employed low doc home loans
- Documentation: Low-doc loans require that significantly less documentation is provided in order to verify sole trader income or business turnover.
- Faster Application Process: As there is a low-documentation requirement, you'll save time tracking down your financial statements, tax returns, BAS statements and other verification from your accountant. This lets you get your application submitted much faster.
- Convenience: The ability to forego all the mountains of paperwork required to verify a traditional self-employed loan is very convenient for a busy self-employed person running a business. If you can find a lender willing to accept a self-certification for your income, or maybe just showing your last few BAS, this is much easier than providing mountains of paperwork.
- Convert to Full Doc: Many lenders will allow low-doc borrowers to convert their self-employed home loan over to a full-doc loan after a period of time without asking for financial verification. In most cases this is after two or three years and only if the loan repayments have been made on time throughout that period. Converting the loan over to full-doc can often mean a slight reduction in interest rate.
- Lower LVR: Many banks will limit the amount of money you're able to borrow against the value of the home you're buying or using as security. Instead of being able to borrow up to 95% of the property value, as a full-doc borrower can, a low-doc borrower is often limited to borrowing 60% of the property value. Some lenders will extend this up to a potential 80%, but may charge LMI for any LVR over 60% which increases your mortgage costs.
- Higher Interest Rate: Many lenders view low doc loans as being riskier than fully verified loans. For this reason, they may charge a slightly higher interest rate as compared to a regular mortgage for a borrower. This is known as a low-doc interest rate premium. There is still the possibility that many lenders can revert the loan over to a full doc loan after a period of time, as long as all the payments have been met.
- Fewer Lender Options: Not every bank or lending institution will accept home loans from low-doc borrowers. Aside from this, some lenders will still require more documentation than others when trying to verify a low-doc home loan. This limits your options and makes it more difficult to negotiate for better deals on interest rates.
What documents do I need to apply for a low-doc loan?
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 is a guide to help you work out what you might need:
Big banks will ask that self-employed borrowers provide two full years' worth of financial statements, including tax returns, profit and loss statements and often the last two or three BAS as well. If you have other income such as investment income, you may also be asked to provide this as well. However, there are low doc lenders available that may only ask for your last three or four BAS and little else.
There are also some lenders that will be 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. You may be asked to provide your accountant's contact information to confirm this.
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 Rate notices, 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 three 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.
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.
How to get your low-doc home loan approved
Perhaps the biggest key to getting any home loan approved is to find the right lender for your specific circumstances. every lender has different lending policies and some are more open to receiving low-doc loan applications than others. These policies will dictate how the lender view self employed home loan applications. This means you risk having your application declined if you approach a bank that won't be lenient with a self-employed borrower. So the key here is to do your research of contact a good broker who can start you off in the right direction.
Another consideration for self employed borrowers is that one of the biggest problems they face when applying for a home loan is that their accountant is often too good. Your accountant works very hard to reduce your taxable income by writing down a lot of your business expenditure. While this might help reduce how much you pay in tax, it also has a negative effect on reducing how much you're able to borrow at the same time. After all, writing down the depreciation on a business vehicle or investment property doesn't actually reduce your real income in terms of how much money you made. It's more like a paper loss. But banks rarely see it this way. They assess how much you can borrow based on your taxable income figure and little else.
If you really want to improve your chances of being approved for a self-employed low-doc loan, you might want to consider talking to a mortgage broker about your options. This way, you'll have a far better chance of approaching a lender that will welcome your application and have lending policies in place that are more likely to suit the level of documentation you're able to provide.
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 two years. They may also require that you're registered for GST. Of course, there are still a few lenders around that will accept applications from self-employed people who have only been in business for between one and two years.
What if I've been self-employed for under a year?
There really aren't many lenders around that will deal with self-employed home loan applications where you've been in business for less than 12 months, but it's not impossible. 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 five years before that, you could still be considered simply because you're still doing the same work. It's just the way in which you're paid that has changed.
How do lenders calculate my income?
When you provide a full set of financial documents to your lender, they don't just look at the most recent years' taxable income. Most will add together two 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 two 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 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 types of home loans are available?
The types of low doc home loans available are generally the same as regular home loans. This includes variable home loans, lines of credit, fixed interest rate mortgages, and even discounted professional packages are available with some lenders. You can also choose between making full Principal and Interest repayments, or making Interest-Only payments to cover just the amount of interest accrued to the account each month.
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.
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