12 Feb How to get a mortgage when you’re self-employed
One of the common misconceptions about mortgages is that they’re almost impossible to get if you’re self-employed. But when more than two million Aussies are running their own business, you know they can’t all be handing over a rent cheque every month or crashing in their parents’ granny flat. Yep, being a small business owner and a property owner don’t have to be mutually exclusive concepts.
Having said that, sole traders and entrepreneurs do have a few more hoops to jump through than the average Joe who’s working for the man and bringing home a regular income. That’s because, like Miley Cyrus’ love life, their cash flow is a little more unpredictable. This naturally presents a bigger risk for lenders, who are expecting you to hand over monthly loan repayments with the punctuality of a German train network.
At the end of the day, these lenders aren’t trying to crush your dreams of becoming the next Jeff Bezos (aka Mr Amazon) – they just want to know that you can service your loan. So with a bit of pre-planning and enough documentation to make those German train drivers jealous, you can secure your dream home without having to return to the office cubicle where career dreams go to die.
Have at least two years of records
ABN? Check. First glowing customer review on Google? Check. Home loan application? Not so fast. As we’ve mentioned, lenders can be a little more nervous about someone who’s self-employed, so they want to see that your business has legs before they sign on the dotted line. Generally speaking, you’ll need at least two years of records (income and expenses) for them to overcome their jitters and so much as glance at your application.
However, one person you should speak to earlier rather than later is your mortgage broker. As we’ve talked about in previous posts, a good broker doesn’t just pop out of the bushes when the hammer comes down at auction – they can provide advice well before you’re ready to buy. In this case, having a chat with a broker can help you get a better idea of what you need to do NOW to increase your chances of getting a loan down the track.
Get your tax returns up to date
One of the most important tasks for small business owners who want to buy a house is making sure your tax returns are up to date. Like we’ve said, lenders want cold hard evidence of your ability to repay the loan, so your tax return is how you prove your earnings in lieu of a standard pay slip. Again, most lenders will want to see at least two years’ worth of these suckers to get a better picture of your income long term.
Where it can become a bit of a balancing act is in determining your taxable income. For most of us, July rolls around and we’re scrounging through the depths of our handbags and tipping out our wallets to find every possible receipt we can use to claim deductions and reduce our taxable income. However, if buying a house is in your near future, remember that the lower your taxable income, the lower your borrowing capacity. So even if you have a tonne of legitimate deductions this year, they could in fact work against you by making your income appear smaller than it is.
Some lenders offer ‘low documentation’ home loans, where you can use your BAS (business activity statement) or bank statements instead of tax returns to show proof of income. However, these types of loans often attract higher rates and require a larger deposit. Your mortgage broker will be able to help you figure out which type of loan best suits your individual circumstances.
Show that you can live within your means
This tip’s not just for small business owners, but for anyone applying for a home loan: don’t spend more than you earn. Just don’t. As lenders have cracked down post-Royal Commission, they’re getting pickier about who they will loan to, and won’t hesitate to go through your bank statements with a fine-tooth comb. While your Instagram followers might be impressed by that new Fendi handbag or the fact that you’re sipping kombucha in Bali every other month (#blessed), your lender most certainly will not.
It might not be sexy, but drawing up a budget and sticking to it is key for getting a home loan. Budgets are particularly important for the self-employed, when your cash flow is often far from consistent and you need to be able to ride out the inevitable peaks and troughs of small business life. So track those expenses (both personal and business) like an SVU detective hunting a perp to ensure you have all the relevant info when it comes time to front up to a lender.
Keep your business affairs in order
It might all feel a bit too-hard-basket to begin with, but it really boils down to good business practice. Spending a little bit of time getting your affairs in order will be well worth it when you’re kicking back in your brand spankin’ new home.
As you get all your ducks in a row, keep a few basic principles in mind. Firstly, show that you’re earning a profit – it sounds obvious, but this is the simplest way to prove to lenders that you’ve got the cold hard cash to pay off your loan.
Keep your business structure as simple as possible and ensure you’ll have access to money when you need it. You could have the most profitable business in the world, but if the funds require the sign-off of multiple business partners, a lengthy approval process from your bank and a secret handshake, they’re not much use to lenders.
And finally, make sure you can explain any large fluctuations or one-off expenses on your balance sheet. Ups and downs are a fact of life when you’re running your own biz, but as long as you can show a general pattern of steady income you’ll have a better chance of locking in your dream home.
Next stop: world domination!
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