Are you self-employed and looking for a home loan? Here at State Custodians Mortgage Company we can help you. Whether it’s a standard loan, or “low-doc” home loans, we have solutions for self-employed people.
When a self-employed person applies for a loan there are some unique issues to face. Sometimes it’s the issue of documentation. Low doc home loans may suit in some of those situations. This article discusses those along with other issues.
What documentation is required?
As a borrower who is self-employed, you’re likely to find that your experience at the bank can be quite a bit different from other people.
If you are PAYG (that is, you work as an employee) when you apply for a home loan and need to verify your income, the documentation you have to provide is relatively simple. Generally speaking all you need to give your lender is a couple of payslips and your latest group certificate. However the requirements are very different for self-employed borrowers. If you are self-employed then most lenders will ask you to provide the last two years audited tax returns to verify your income. (Some lenders may only require one year’s tax returns however currently this is more the exception than the rule). This allows the lender to see the whole picture of how income flows through your business and can better understand your financial situation. This process of applying for a home loan when self-employed can involve a lot of paperwork. Not only do you need to provide your personal income tax returns but also all company, trust, or partnership returns, financial statements and tax assessment notices.
When a lender is verifying your income levels they are also looking for consistency. For example, if in Year One your tax returns state your income as $50,000 and then in Year Two your income increases to $100,000 many home loan lenders will see this as too inconsistent and will only attribute to you an income of $50,000 or at best, $60,000 (being a 20% increase on the lower amount) for the purpose of determining your borrowing power.
Because the lender is looking to loan you a considerable sum of money that you must repay consistently over the life of the loan it is essential to demonstrate a consistency in your income levels. Some lenders may consider using the higher income of $100,000 in their servicing calculations provided you have suitably explained the reason why Year One was an abnormal year and that Year Two’s income levels are more reflective of the ongoing situation.
It’s a matter of timing
For self-employed borrowers, providing two years’ tax returns can be problematic if the timing isn’t just right. This is because the most recent lodged tax returns may in fact be 18-32 months old and more reflective of the business 2-3 years ago and not an accurate representation of the current situation. Perhaps two years ago things the business was only just picking up but now things are very good and you have consistent profit. If you haven’t yet filed your most recent tax return you won’t be able to easily demonstrate this position.
Low doc home loans solution for self-employed borrowers
Given that everyone would like to have a cheap home loan, given that it also had all of the features and benefits needed, it’s worthwhile for the self-employed borrower to aim for one of the standard home loans. However, if the documentation is a problem, other loans are available which allow for alternative forms of documentation. Some of these are commonly referred to as low doc home loans.
The best way for you to work out what is going to be suited to you and your situation is to give the friendly credit managers at State Custodians Mortgage Company a call on 13 72 62. They understand the needs and situation of self-employed people and will be happy to provide practical assistance.