Having the luxury of being self employed, qualified accountants and finance brokers means we have learnt a thing or two about obtaining finance for the self employed. Im not going to lie, the process can sometimes be more difficult but it doesn't have to be if you plan in advance. Here's 10 things you should consider:
Risk forms a big part of your banks assessment of your situation and stability is key. Large variations in financial performance without reasonable justification can be to your detriment.
Tax avoidance - catch 22
Consider the implications of managing your business and the overall impact on your final year position because actively expensing personal items through your business to reduce your tax burden will also mean that you reduce your overall income and borrowing capacity.
One off transactions can often be overlooked. For example bad debts resulting from unsettled accounts, setup costs or income from the sale of assets that are not part of day to day trading will often be removed impacting financial performance.
Artificial accounting adjustments in your financial performance can sometimes be ignored. Banks are really trying to reconcile your performance on a cash basis and adjustments like depreciation and amortisation distort this.
Hold funds for your tax debts because you'll need to pay for them and the bank expects you to be able to. Tax debts are almost an evil word when it comes to banks so be mindful of this.
Existing Business Debts
Debts held by your business still impact your personal borrowing capacity. Generally speaking responsibility of debt obligations held in your business typically fall upon the individual.
Self employment does tend to add another layer of documentation to the home loan application process. Banks want to ensure your ability to repay the debt and the way they do this is by asking you to evidence stability in your business. This typically comes in the form of income tax returns and in some cases financial statements.
ABN and trading time
Mainstream banks tend to care about how long your ABN has been open for regardless of business profitability. Unfortunately, a logical approach to assessment isn't always the case. However, there may be ways around this.
When considering the nature of most business structures I'd be comfortable in saying that the majority of them are usually born out of tax minimisation strategies and asset protection. This completely makes sense from an accounting perspective but you need to be aware that your bank may have a different point of view. Some banks take a more logical approach when assessing financial performance of your business relative to others so it is important to choose the right one.
Timing is everything
Bank policy dictates financial documentation requirements for the self employed and varies across the board. Bear in mind that this can be a disadvantage or an advantage when it comes to getting a home loan.
Among other things your broker will consider the above in their assessment of your situation but it pays to be aware of it because you may find that home ownership takes a little bit longer to get your ducks in a row. Our advice is to take note and start planning now.