“Be prepared to explain fluctuations in your income,
especially if it has significantly increased or fallen over
certain periods.”Keep it simple
One pitfall to be aware of is over-complicating your
business affairs. “Banks are very process driven,” says
Gallagher. “If you have something like complex lease
arrangements, the lender is unlikely to invest time trying
to understand how it all works. Presenting information
that is easy to understand will work in your favour.”
This particularly applies to the way you structure
your business. “If you don’t have control of the income
flow a lender may say no to a loan,” says Gallagher. It’s
a problem that can arise if you have less than a 50%
stake in a venture, as can be the case with a three-way
partnership. Even then, Gallagher says loan options for
more complex work arrangements may be available
through specialist lenders, though this could mean
paying a higher rate or stumping up a larger deposit.Lowdown on low-doc loans
If you don’t have up-to-date tax returns, it may be possible
to be considered for a low-documentation home loan.
Mitchell says this means providing evidence other than
tax returns, such as business activity or bank statements.
It may sound like an easy option but not all lenders
offer low-doc loans. Among those that do, the interest
rate is often higher than for a regular loan. As a guide,
Bendigo Bank’s low-doc home loan comes with a rate of
5.58% compared with 3.99% for its basic home loan. And
as lenders regard low-doc loans as higher risk, you may
need a deposit of at least 20%, in some cases more. The
upshot is that it can be worth getting your tax affairs
up to date and putting yourself in the running for a
more affordable home loan with a mainstream lender.Maintain good records
These days lenders don’t just want to see evidence of
income. They also like to get a better idea of a borrower’s
living costs regardless of employment status. This makes
good record keeping a must for all home loan applicants.
Mitchell says that lenders have their own requirements
for expense verification, but self-employed workers should
keep all invoices relating to their business expenses
so that they can supply them to the lender if need be.
One final point worth noting is that if you’ve only
just begun working for yourself, it may pay to delay
your home-buying plans until you’re established and
have a better idea of your annual income. “If you’ve
become self-employed in the past two years, don’t have
an expectation that you will automatically be eligible
for a home loan,” says Mitchell. “Lenders want some
comfort that your business is generating enough income
to service a loan. This is especially so if you’re in a
start-up business where cash flow is tight.”
Speaking to a lender or mortgage broker at an early
stage will give you a better idea of whether you’re likely to
qualify for a home loan and how much you can borrow. Myour taxable income is one of the issues that catches
the tax office’s eye.
The solution can involve compromise. “If your goal
is to purchase a property in the next 12 months or so,
speak to your accountant and make them aware of
the potential need to maximise your income for that
purpose,” says Mitchell. It can come down to the choice
between saving on tax and qualifying for a home loan.
Lumpy cash flow isn’t a problem
One of the downsides of working for yourself is the
potential for irregular income. Some weeks can bring a
flood of pay cheques while others can see just a trickle
of income or none at all. Without the benefit of set
pay days, it can take discipline to stick to a budget and
manage regular mortgage repayments. Fortunately, this
“lumpy” cash flow shouldn’t work against you when
you apply for a home loan.
“It’s generally not a problem,” says Mitchell. “Lenders
will look at a borrower’s total income over the past 12
to 24 months. The fact that the income may have been
earned irregularly is not that important.”
Mitchell adds that lenders like to see consistency.
Lenders
also like to
get a better
idea of a
borrower’s
living costs
regardless of
employment
status