February 19, 2019 Caitlyn Smith4 mins

Applying for a home loan can be daunting, and even more so when you’re self-employed. With the home loan industry stuck in traditional ways of thinking, there are many roadblocks self-employed people face when applying for a loan. But it’s not as bleak as it sounds. Slowly, but surely, home loan providers are adapting and accommodating the growing self-employed workforce.

What you’ll need.

As a self-employed person applying for a typical home loan you will need the following:

  • 2-3 years of experience as a self-employed worker
  • Your ABN (registered for minimum of 2 years)
  • Your GST registration details (registered for minimum of 2 years)
  • 12 months worth of BAS forms
  • 2 years of completed tax returns for your business
  • 2 years of completed tax returns for yourself
  • Enough income to be able to comfortably pay back your loan
  • Consistent income

However, there are some alternative loan options that can reduce the rigmarole (like our CO:Lab Accountant Verified home loan) – we discuss this a bit later.

 

You need experience in being self-employed.

It’s not as simple as ticking the ‘self-employed’ box on your home loan application, especially if you’re newly self-employed. Most home loan lenders will want you to have been self-employed for at least 2-3 years before they will consider your application. This is because they are looking for evidence of ‘stability’ and your ability to pay your home loan over the next 30 years. And if you have less than one year's experience, you will be even more limited in the options you have for home loans. You may have the finances to afford it, but not many lenders will give a home loan to someone who is newly self-employed because the certainty of your future income isn’t as clear (whether reasonable, or not). So, you may end up needing to wait a few years before you can successfully apply.

 

You need a lot of paperwork.

The amount of paperwork and documentation required to apply for a home loan as a self-employed person can be a huge roadblock for some. Because you aren’t employed in a ‘traditional’ sense, lenders require more documentation from you in order to establish that you have the appropriate income and financial situation. If you aren’t exactly up to date with your paperwork, this can be quite a headache.

Lenders generally need the following things from you:

  • Your ABN (registered for minimum of 2 years)
  • Your GST registration details (registered for minimum of 2 years)
  • 12 months’ worth of BAS forms
  • 2 years of completed tax returns for your business
  • 2 years of completed tax returns for yourself

 

Your taxable income matters.

As a self-employed person, you have a lot of expenditures that you can claim as tax deductions. This lowers your taxable income and lessens the amount of tax you will need to pay – which is great, right?  At tax time, yes. But when it comes to applying for a home loan, the less taxable income you have, the less the banks want to lend to you. This creates a catch-22 for the self-employed: you can either save on paying tax but lose out when applying for loans, or have more taxable income for loan applications but end up paying more tax.

 

Your income isn’t always consistent.

Being self-employed often means that you have fluctuating amounts of income. This isn’t unusual and is often the case for any business. Some months are better than others and as the business owner this means you have an inconsistent income. This becomes a challenge for lenders because it makes it harder to determine your ability to pay off your loan. Before they can give you a loan, lenders need to know you will be able to make your repayments on time and without putting too much pressure on your finances.

 

The way we work is changing.

Although the way Australians are working is changing, the home loan industry is still stuck in the past. It’s simpler to approve people for home finance when they’re working full-time in a 9-5 job for an established business. But for a lot of Australians, this just isn’t the case. Around 17% of Australians are self-employed and do not fit into the 9-5 mould. The rise of the gig economy has seen more Australians opting to work in more temporary positions, choosing to work on projects rather than settling into a fixed position in a company. As independent contractors Australians are working with multiple businesses and choosing what hours they work. Although this style of work is becoming more popular, the home loan industry has yet to adapt and cater for this type of applicant.

 

Is there any other option?

Despite all the requirements making it harder to get access to home finance, there are other options out there for self-employed Australians. There are an increasing number of home loan providers who are offering home loans that require less paperwork and are generally more flexible. Tic:Toc for example, now offer CO:Lab loans which allow alternative ways to verify your financial situation, requiring far less paperwork.

 

For more information, take a look here.