Sole traders and other self-employed borrowers can often qualify for the same home loan as a borrower with a salaried income. But if you lack evidence of your business income you'll need a low doc loan.
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 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 instead of a steady monthly salary.
PAYG borrower. PAYG means pay as you go. You work for a company that pays you a regular salary. Your employer deducts your monthly tax obligations automatically.
Full doc loan. A full doc, or full documentation loan, is the standard mortgage for PAYG borrower. If self-employed borrowers have 2 years of tax returns and other documentation, they may qualify for a full doc loan.
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 or a business activity statement for the last year.
What is a sole trader?
The ATO defines a sole trader as an individual running their own business:
"If you operate your business as a sole trader, you are the only owner and you control and manage the business. You are legally responsible for all aspects of the business. Debts and losses can't be shared with other individuals."
The term self-employed is a bit broader, and can include freelancers or people who work for multiple clients.
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. And each lender has slightly different requirements. But here's basic outline.
Full doc requirements
Business tax returns (2 years)
Personal tax returns (2 years)
Notice of tax assessment from the ATO
Bank statements for your business
Low doc requirements
Proof of your ABN registration
Proof of your GST registration
Bank or business activity statements (usually 6-12 months' worth)
An accountant's letter
Interim financial statements
Am I better off with a low doc home loan?
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.
Disadvantages
Higher interest rate. Lenders view low doc loans as riskier and charge higher interest rates than they do with regular full doc mortgages.
Lower loan to value ratio (LVR). With full doc loans many lenders will let you borrow 90% or even 95% of your property's value. But low doc loans usually have lower LVRs, meaning you need a bigger deposit and can borrow less.
Fewer lender options. Not every bank or lending institution lends to low doc borrowers. This limits your options and makes it more difficult to negotiate for better deals on interest rates.
Benefits
Easier application process. Low doc loans require less documentation. This makes the application process easier.
Convert to full doc later. Many lenders allow low doc borrowers to convert their self-employed home loan over to a full doc loan after a period of time. In most cases, this is after 2 or 3 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.
Expert insight
"Low doc or alt doc home loans are good options for self-employed borrowers if they have not lodged their tax return, have an unpredictable income stream or if the business is newly formed and has not been trading for more than 2 years. But self-employed borrowers can apply for a standard home loans if they can provide the required documents (individual tax returns, notice of assessment, company financials) and pass the lender's servicing policy."
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.
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.
Credit history. 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.
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. This means you risk having your application declined if you approach a bank that won't be lenient with a self-employed borrower.
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.
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Frequently asked questions
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.
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.
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.
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%.
Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards.
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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University.
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What about Sole Traders who don’t have ABNs but do have Tax returns for the previous two years? Also, is it possible to get a loan if you have 50% LVR and the loan is less than 100K? I also have a very high credit ranking.
Finder
ShirleyMarch 11, 2015Finder
Hi Liz,
Thanks for your question.
If you only have limited documents such as your tax returns for the previous two years, there is always the option of speaking to a home loan broker. They will be able to help you further in narrowing down a suitable home loan option.
You can typically borrow 50% LVR with a loan amount less than $100,000 but you would need to do some research and see which lenders offer this option. Most lenders start their loan amounts from about $50,000.
Cheers,
Shirley
AndrewNovember 15, 2014
I am an Investor and not working for a company.
I would like to know what documents i need to provide in order to get a low-doc home loan?
I am an Australian and based overseas, meaning i earn income from my personal investments overseas and pay taxes overseas.
Thanks.
Finder
ShirleyNovember 17, 2014Finder
Hi Andrew,
Thanks for your question.
You’ll need to provide proof of your income, assets and credit history. These could things like tax returns that you’ve completed overseas, any documents confirming your title for your assets and a credit report from a country that you’ve conducted in.
Is there any lenders who let you borrow when self employed and only owning abn for a year
Finder
ShirleyAugust 4, 2014Finder
Hi Kylie,
Yes, there are few banks who may be able to help. You may want to consider the big four, along with second tier lenders such as St.George, Bankwest, Citibank etc.
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What about Sole Traders who don’t have ABNs but do have Tax returns for the previous two years? Also, is it possible to get a loan if you have 50% LVR and the loan is less than 100K? I also have a very high credit ranking.
Hi Liz,
Thanks for your question.
If you only have limited documents such as your tax returns for the previous two years, there is always the option of speaking to a home loan broker. They will be able to help you further in narrowing down a suitable home loan option.
You can typically borrow 50% LVR with a loan amount less than $100,000 but you would need to do some research and see which lenders offer this option. Most lenders start their loan amounts from about $50,000.
Cheers,
Shirley
I am an Investor and not working for a company.
I would like to know what documents i need to provide in order to get a low-doc home loan?
I am an Australian and based overseas, meaning i earn income from my personal investments overseas and pay taxes overseas.
Thanks.
Hi Andrew,
Thanks for your question.
You’ll need to provide proof of your income, assets and credit history. These could things like tax returns that you’ve completed overseas, any documents confirming your title for your assets and a credit report from a country that you’ve conducted in.
Speaking to a mortgage broker may be best in this case.
Cheers,
Shirley
Is there any lenders who let you borrow when self employed and only owning abn for a year
Hi Kylie,
Yes, there are few banks who may be able to help. You may want to consider the big four, along with second tier lenders such as St.George, Bankwest, Citibank etc.
Cheers,
Shirley