How to get a home loan when you're self-employed

If you’re self-employed and looking to buy a home, it will help to know the process and the documents required to get a home loan, in case you need one. In the past, it was difficult to apply for a home loan if you didn’t have a steady job with a regular income, that’s been changing.

As a self-employed individual, you may not always have as steady an income as those employed by others, but this no longer impacts your ability to get a loan as much. You can apply for a loan that’s known as a full doc home loan if you can provide all the documents required by lenders. Alternatively, you can apply for an alt doc or low doc loan, which may have a higher interest rate but fewer documentation requirements.

Can self-employed borrowers get home loans?

Typically, an application for a traditional home loan requires the borrower to submit payslips as proof of employment and their latest bank statements to show sufficient savings for the deposit. However, as a self-employed borrower, you may not be able to provide those. Instead, submitting your tax returns for two years may fulfil this requirement. In the absence of those records, you can offer a self-certified income statement or a letter from your accountant confirming your income.

The lender will review the documents you’ve submitted to estimate your income and borrowing capacity. As there are likely to be significant fluctuations in income in the early years of self-employment, the lender will calculate the amount that they believe is predictable. To help ease the lender’s concerns, you could work with your accountant to collate documents that prove your income is sufficient and regular.

Ideally, you want to give lenders enough reason to trust you as a borrower and dispel any doubts that you can repay the home loan. You may qualify for a smaller loan with a possibly higher than expected interest rate if the lender can’t confirm your income.

How do I go about getting a home loan when self-employed?

At the time of applying for a home loan while self-employed, you need to pay a deposit, which means you need to have adequate savings. You also need to prove to the lender that you have the financial ability to repay the loan amount. Salaried people will likely find this part of the process easier than those who are self-employed. But as a self-employed borrower, you may opt for a low doc home loan, which requires less documentation, rather than a full doc home loan.

Here’s a quick look at the documentation required for different home loans types if you’re self-employed, that will help you make a more informed choice about which will suit you.

How to get approved for a home loan if self-employed for over two years?

If you’ve been self-employed for two years or longer, you may be eligible to apply for a standard home loan. Once you submit all the required documents with your application, the lender will review your tax returns to determine your income. Some lenders will consider your highest income figure, especially if your income has increased significantly year to year, and others may go with the average.

Another aspect that lenders might take into consideration is the amount of time you’ve spent in your line of business before becoming self-employed. Lenders will also check your credit history. They will look closely at all previous loan repayments to understand if you pose a higher risk as a borrower.

Be careful when applying, because if your home loan application gets rejected, it could impact your credit history negatively. This change will then become an issue when applying for another loan. It might be a good idea to sit down with a financial expert or mortgage broker to understand the process of getting a home loan while self-employed and reduce the chance of rejection.

If your home loan is approved, you could borrow up to 80 per cent of the value of your home, as well as lower interest rates and other favourable home loan features.

How to get approved for a home loan if self-employed for under two years?

If you’ve been self-employed for less than two years, it may be simpler to apply for a low doc home loan as you won’t have the documentation needed for a full doc or standard home loan. With a low doc loan, lenders will ask for one year’s financial statements or might agree to a self-verified income statement along with a few months’ bank statements. The lender may also ask you about prior work experience in your chosen line of work.

Qualifying for an alt doc home loan makes you eligible to typically borrow about 60 per cent of your home’s value. If you need to borrow more, you might need to buy lenders mortgage insurance (LMI).

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