Getting a Home Loan When You're Self Employed: 10 Crucial Considerations

If you are wondering whether you can get a home loan when you're self-employed exploring, you're likely aware of the additional intricacies this process entails. As seasoned mortgage brokers, we've gathered invaluable insights that can significantly streamline this journey for you. In this comprehensive guide, we'll delve deep into each critical aspect of securing a home loan when you're self-employed, so you can be best prepared come the time you apply.

Did you know? Beyond Broking has helped self-employed individuals secure home loans for almost 10 years! If you have any questions or would like to learn whether you are eligible for a home loan, feel free to get in touch.

1. Stability of Income 

Stability forms the bedrock of getting ahome loan when you're self employed home loan. Banks evaluate your financial history for consistency and reliability. Any large variations in financial performance without reasonable justification can be detrimental. It's imperative to present a narrative of stability, emphasising your business's reliability over time.

To strengthen your case, provide thorough documentation showcasing the stability of your income. This could include detailed financial statements, tax returns and evidence of consistent cash flow. By doing so, you paint a vivid picture for lenders, assuring them of your business's robust financial foundation.

Additionally, consider engaging in proactive financial planning to demonstrate foresight and preparation, addressing any potential concerns before they arise.

2. Tax Efficiency

While actively managing your business for tax benefits is a prudent strategy, it's crucial to strike a delicate balance to avoid impacting your overall income and borrowing capacity negatively. The line between reducing your tax burden and maintaining a healthy income level is a common challenge for self-employed individuals.

Our brokers, with our Accounting background, can provide tailored advice surrounding your tax strategy and how to avoid your eligibility for a home loan.

Drawing on our expertise in Accounting, our Mortgage Brokers are well-equipped to navigate you through the intricacies of preparing for a home loan application. Should you have any queries regarding your specific circumstances, please don't hesitate to reach out to us or check our our our page about getting a home loan when you're self employed.

3. One-Off Transactions

In the dynamic landscape of self-employment, one-off transactions can significantly impact your financial performance. These can include bad debts resulting from unsettled accounts, setup costs or income generated from the sale of assets that fall outside your regular business operations.

To ensure these one-offs are adequately considered and justified in your home loan application, document and explain each occurrence, such as a depreciation schedule, to reinforce your financial responsibility in the eyes of lenders.

4. Accounting Adjustments

Banks strive to understand your financial performance on a cash basis, aiming to reconcile the real, tangible income and expenses of your business. When preparing your financial documentation, ensure clarity in presenting your business's true financial position. Clearly distinguish between actual cash flows and accounting adjustments to provide an accurate representation of your income.

Again this is what we can advise on. Consider collaborating with an experienced accountant or financial advisor who can help you prepare financial statements that align with the bank's assessment criteria. Providing a clear and transparent financial picture minimises the risk of misinterpretation and enhances your credibility as a borrower.

5. Tax Debts

Unpaid tax debts can be viewed as a red flag by lenders, potentially impacting your eligibility for a home loan. As a self-employed individual, it's essential to proactively manage and address any outstanding tax obligations.

Create a dedicated fund to cover your tax debts, showcasing financial responsibility and preparedness. Set aside a portion of your income specifically for tax payments, and maintain a consistent track record of meeting your tax obligations.

When communicating with lenders, transparently disclose any existing or past tax debts and outline the steps you've taken to rectify them. Providing evidence of your commitment to meeting financial obligations strengthens your case and mitigates concerns about your financial responsibility.

6. Existing Business Debts

While self-employment often involves managing debts within your business, it's crucial to recognise that these obligations can impact your personal borrowing capacity. Some lenders consider the individual's liability for business debts when assessing eligibility for a home loan.

Thoroughly assess your business's debt profile and work towards minimising any unnecessary or high-impact debts. Clearly outline the separation between personal and business debts, providing documentation that highlights your individual responsibility for each.

Additionally, demonstrate a proactive approach to managing business debts by showcasing a consistent track record of timely repayments and debt reduction. This proactive stance reinforces your financial responsibility and enhances your appeal as a low-risk borrower.

7. Increased Documentation

Self-employment introduces an additional layer of documentation requirements in the home loan application process. Lenders aim to ensure the stability and viability of your business by assessing detailed financial records. This typically involves providing income tax returns and in some cases, comprehensive financial statements.

To navigate this increased documentation requirement, maintain meticulous financial records throughout the year. Implement robust accounting practices that include regular updating of financial statements and timely filing of income tax returns.

Engaging the services of a professional accountant who specialises in self-employment is a must. They can assist in preparing comprehensive financial documentation such as returns and financials that aligns with the expectations of lenders, streamlining the application process.

At Beyond Broking,  we have short form and fast tracked verification with lenders who simplify this down to just a Notice of Assessment. If you want to see if you are eligible, feel free to get in touch

8. ABN and Trading Time

Mainstream banks often place significance on the duration your Australian Business Number (ABN) has been active, irrespective of business profitability. While this criterion may seem illogical, it's essential to strategise and possibly find alternatives to navigate this aspect of the assessment process.

If your business is relatively new, consider exploring lenders who adopt a more logical approach by focusing on other indicators of financial stability. Some lenders may prioritise consistent income levels or demonstrate flexibility in their evaluation, providing more opportunities for self-employed individuals with newer businesses.

In your home loan application, clearly outline the factors that contribute to the stability and success of your business, aside from the duration of your ABN. Showcase consistent revenue streams, positive cash flow, and other indicators of financial health to bolster your case.

At Beyond Broking, we work with clients who have been trading for less than 2 years to help them secure home loans. If you haven’t been trading for long, we’d love to point you in the right direction. Complete the enquiry form below to get in touch.

9. Operating Structure

The nature of business structures often revolves around tax minimisation strategies and asset protection. While this approach is common from an accounting perspective, it's essential to acknowledge that lenders may have a different viewpoint.

Banks vary in their assessment of the financial performance of businesses based on their operating structures. Some lenders may adopt a more logical and flexible approach, while others may have stringent criteria.

At Beyond Broking, before selecting a lender,  we thoroughly research their approach to evaluating businesses with different structures. We then choose a lender whose criteria align with your business's performance assessment strategy. This proactive approach ensures a smoother application process and increases the likelihood of a favourable outcome.

10. Timing is Everything

Bank policies on financial documentation requirements for the self-employed can vary significantly. Understanding these policy nuances is crucial, as it can either work to your advantage or disadvantage when applying for a home loan.

Stay abreast of any policy changes or updates from lending institutions that may impact the documentation requirements for self-employed individuals. Timely awareness allows you to prepare and submit the necessary documentation, maximising your chances of a successful application.

At Beyond Broking , we regularly check the policies of our lender so we can ensure your application strategy meets any changes. Proactive monitoring of policy updates positions you as an informed and well-prepared borrower, strengthening your credibility in the eyes of lenders.

While your mortgage broker will consider these factors in their assessment of your situation, proactively understanding and planning for these considerations can significantly streamline the home loan process. Homeownership for the self-employed may require a bit more preparation, but with careful planning, your dream home is well within reach.

Start planning today for a smoother journey towards homeownership. If you have any specific questions about home loan when you're self employed or require personalised advice tailored to your unique situation, feel free to reach out to us. We're here to guide you every step of the way.

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