If you are self employed, or work as a contractor, getting a home loan isn’t always easy. Your income is more likely to fluctuate, your work isn’t necessarily guaranteed, and typically evidence of income can be difficult to produce. Tax returns and financials may paint a picture of your income in the last financial year, but will not necessarily reflect how your business is going now.
However, in reality, if you’re prepared, and have all the correct documentation in place, securing the home loan you want doesn’t have to be as difficult as you may think.
Here are a few tips:
Avoid 'low doc' loans
A 'low doc' loan is one where you need to show less documentation up-front, in order to secure your mortgage. This means you’ll provide things like bank statements, financial statements and declarations from your accountant, rather than your financial statements and tax returns.
If you do have tax returns, it can be worth pursuing a full documentation loan at standard rates.
If you provide a lender with detailed and current information, the process will be considerably easier.
Work on your 'serviceability'
When evaluating your finances, lenders will consider how much cash you earn, minus your monthly expenses. The gap - or your ability to service your loan - is called serviceability.
Eliminate your debt
Debt can be tricky to manage - particularly if you’re self employed, and want to secure a loan.
Before speaking with a lender, try to eliminate or reduce your consumer debt as much as possible. This could include reducing the limits on your credit card(s). Be aware that a lender will consider the actual limit on your credit card as money owed, not the balance.
Show you can save
By providing evidence of savings that you have, it will indicate to the lender that you are in control of your income, and able to reserve cash for a situation where it is required.
Keep your tax up to date
It’s important to keep your tax up to date so you can always show your most recent income history. And make sure your tax assessments are lodged and paid. As a self employed applicant, you will usually have your tax portal checked for any tax payments that can be outstanding.
Understand your business structure
There are many different ways that you can structure your business so as to minimise your tax as a contractor or when you’re self employed. However, if your taxable income is too low, this can make it quite difficult to get a home loan. Lenders will be wary of your ability to make repayments.
If you have a strategy in place, it’s important to understand how this affects your personal income. You may wish to consider changing the structure for a period prior to purchasing a property, so you can secure a loan in the first place.
Have a strategy in place
It may be worth consulting with a mortgage broker to formulate a plan for buying your property. This allows you to build your serviceability based on expert advice. Do so early, so you can make any necessary changes before actually applying for a loan.
Build a positive record
Once you already have a mortgage in place, it is possible to use it to consolidate debt or refinance to a better loan. However, you must at least have a good record with that loan, amongst other things in order to qualify. Subsequent lenders will be interested in seeing a history of on-time payment and any extra lump sum payments you made.
Be open and honest
Finally, always be open with brokers or lenders. They are required to verify what you say and perform checks on the documents provided. If you don’t tell the truth, you could find yourself in legal trouble or with a loan that you can’t afford.
Are you ready to take the next step?
If you are self employed or a contractor and would like to find out more about your financing options, a Yellow Brick Road adviser can help.
Contact us today on 1800 927 927.