If you are self-employed, you can apply for the same mortgages as anyone who is employed by another person or business. The major difference between applying for a mortgage for those of us who are self-employed is the level of detail you will have to submit regarding your financial situation. To help you better understand the requirements of applying for a mortgage if you are self-employed, here are six expert tips.
Improve your cash flow
If you are self-employed, utilizing a financial plan to improve your cash flow is critical. If you want to find a good way to qualify for a high loan amount from certain lenders, you should pay off your outstanding debts—personal loans or credit cards, for instance—which will make a huge difference when it comes to improving your cash flow, and possibly even your credit score.
Providing details of your business’ finances is a good way to get a mortgage if you are self-employed. The documents you are required to provide are very different to those required by salary earners. For this reason, it is crucial to maintain the habit of keeping good business records, since having wrong or inaccurate documentation of your financial position may make it more difficult to apply for a home loan.
For sole traders, the documents outlining your financial position should include your personal tax returns, which will be supported by each year’s Australia Taxation Office (ATO) notice of assessments. For business partnerships, companies and trusts, you should include the following: partnership, company, or tax returns; financial statements which include profit and loss accounts and balance sheets; and personal tax returns, which will be supported by each year’s Australia Taxation Office notice of assessment.
When applying for a mortgage if you are self-employed, it is important to make sure your records are accurate. It is usually best practice to provide original documentation such as recent bank statements, past payslips, or anything else that can accurately confirm your financial situation.
Prior to applying for a mortgage, some basic records you should prepare will likely include: outstanding loans, such as credit cards, prior home loans, or personal or car loans; savings history; employment details; and existing assets, such as superannuation, real estate, investments, or vehicles.
Maintaining a high credit score will make your chances to qualify for a home loan that much better, and that applies whether you are an employee or self-employed. It is important to know that your lender will inspect your business’ credit history—rather than simply running a credit check on you—to ensure your company has a strong credit score as well.
You can, however, still improve your credit score by organizing yourself and finally repaying those unpaid debts on time, if you do happen to find yourself with bad credit. And to make sure there are no mistakes, you can also check your credit score from your provider.
More than if you are completing a standard home loan application, applying for a home loan when you are self-employed usually involves more documentation. That means there are more complex requirements, nuances, and documents to submit, making it critical to connect with your broker or bank early in the application process to build a strong relationship. Doing this will ensure the broker or lender will take the necessary time to fully know your personal situation—and provide guidance and sound financial advice throughout the application process.
This is a common approach, especially if you use a tax professional or an accountant to do your tax returns. If you use tax minimisation, your taxable income usually appears lower and could impact your loan approval or loan amount. The best approach is to speak with your tax professional or accountant to tell them you want to buy a property within the next two years or so. The reason for that is that you might then need to provide two years of your business’ financial records. For your home loan application, you could be required to maximise your income.
Additionally, you might want to explore tax deductions for any expenses related to your business that you would want to claim. Any tax deductions might help you increase your home loan deposit savings.
