What you should know about home loan criteria for self-employed borrowers

Your friends and family may have given you a lot of info about applying for home loans, but does it all still apply to you if you’re self-employed? Special home loan criteria may apply for self-employed borrowers, so it’s important to be prepared to help ensure you get a home loan that will suit your needs.

How are self-employed home loan requirements different from traditional home loan requirements?

Whether you’re self-employed or a salaried worker, lenders will try to find out if you can repay the home loan based on an estimate of your current earnings. Lenders offering traditional home loans, or full documentation (full doc) home loans, determine your income from your payslips if you are an employee of a business.

When you’re self-employed, you’re technically your own employer and your own employee, so you can’t really create your own payslips to help prove your income. You may find it more difficult to prove that you will continue to have a steady income that will help you repay a loan.

But that doesn’t mean self-employed borrowers can’t apply for home loans. Some lenders offer special home loans for self-employed borrowers that have different criteria to fulfil, especially in terms of the income documents you need to submit. Instead of providing payslips, you may be asked to show your tax returns or even an income statement.

Because these loans use different documentation to prove your income, they are known as low-doc or alt-doc home loans (low documentation or alternative documentation loans). There also used to be “no-doc” or no documentation loans, but these are no longer available as lenders are obliged to collect at least some paperwork to prove that they are lending money responsibly.

Documentation requirements can vary between lenders based on how long you’ve been self-employed. You will probably need to submit tax returns for the previous two years, meaning they will expect you to have been self-employed for at least two years.

If you can’t, you may still qualify for a home loan, it may just be a different type that requires alternative documentation. These documents can include a self-verified statement of your income, an accountant’s letter, and Business Activity Statements (BAS). Also, lenders will almost always ask you for bank statements and business financial statements to showcase savings history and overall finances.

How do lenders assess your home loan eligibility?

Working out if you’re eligible for a home loan depends on more factors than simply the documents you can present. Proving that you have sufficient cash in hand to pay the deposit and evidence that you earn enough to repay the loan is a crucial part of confirming eligibility. Lenders will also look at your credit history and whether you’ve repaid loans in the past to gauge how reliable you are with repayments.  

When considering applications from self-employed borrowers, some lenders may prefer estimating the income through their own calculations, especially if there is a significant difference in the income reported on one year’s tax returns compared to the previous year.

Based on these calculations, lenders may decide that your income can’t be verified sufficiently and reduce the acceptable loan-to-value ratio (LVR) of your home loan. This change in LVR would mean you can only borrow up to 60 per cent of your home’s value, and you’d need 40 per cent deposit upfront. The lender may also increase the interest rate on the home loan, possibly upsetting any budgeting plans you had to help repay the loan.

But if a lender is satisfied with your financial situation, you may be able to borrow up to 80 per cent of the home’s value, and potentially even pay a lower deposit or benefit from a better interest rate.

Can you get help working out what kind of home loan you’re eligible for?

The best home loan for your needs will depend on your financial situation and personal goals. You can compare home loans and use filters to narrow down your options to only those that may most closely match your needs.

Once you’ve assembled your shortlist, you can check each lender’s eligibility criteria to find out what documents they’ll need to support your application. If this information isn’t available on their website, you should be able to find it out by contacting the lender.

If this sounds complicated, or if you just don’t have the time to comb through home loans while also managing your self-employment, you could consider getting in touch with a local mortgage broker. These home loan experts can look at your finances and put you in touch with lenders whose eligibility criteria you’re more likely to be able to fulfil, and who offer home loans that may better suit your situation. Plus, they can negotiate with the lender on your behalf and even manage the application process for you, allowing you to concentrate on looking after your own business.

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