Self-employed borrowers often come up against the challenge of not being able to present a raft of payslips and tax returns to back up their loan applications. But this need not stop you buying your dream home or an investment property.
Many lenders offer low-doc loans for self-employed borrowers who can’t hand over payslips and employment records. This means that, rather than the usual documentation, you prove your ability to service a loan using bank statements, declarations from your accountant and financial records.
Of course, as with any mortgage application, you must still prove that your income outstrips your spending and you can service the loan. Getting this right is more than presenting a lender with a few quick sums on the back of a napkin; it takes solid preparation.
Here are some quick tips:
- Reduce debt: pay down credit cards and personal loans, and be sure to lower the credit limits as they are
paid down, as lenders assess the total credit available to you as a potential debt level, not just the
amount you owe.
- Speak to a finance broker about how the structure of your business and your taxable income will impact your ability to borrow.
- Do your taxes when you should, and always pay your tax assessments on time.
- Save. Saving a deposit is obviously important, and showing your ability to live within your means and save
is as well. This is key to serviceability – you want to show at least a six-month history of high income
and low expenses.
- Go to a finance broker, rather than a bank. Finance broker have access to specialist lenders that assess
applications on a case-by-case basis and tailor their products to self-employed borrowers and contractors,
while many bank lenders do not.
Low-doc loans do differ from standard loans in a few ways, apart from the application process. Lenders offset the extra risk they are taking by lending to a self-employed borrower or contractor by charging slightly higher interest rates and placing some extra rules on loan-to-value ratios (LVR) and insurance requirements.
Most lenders will also insist on an LVR of no more than 80 per cent – meaning that under no circumstances will they lend more than 80 per cent of the property value, as assessed by the lender.