Obtaining a loan if you’re self-employed is rarely without its challenges, but it certainly can be done
Self-employed borrowers are a minority, but a significant one. There are many out there, from tradesmen to freelance writers, from contractors to small business owners and so on.
One in 10 working Australians is their own boss (according to the Australian Bureau of Statistics), and the number grows every day. But applying for a loan as a self-employed borrower in the post-GFC lending environment can be an arduous task – especially if your recordkeeping isn’t up to scratch.
Because a self-employed borrower will probably have more hurdles to overcome than a PAYG borrower, knowing what it takes and preparing ahead of time is essential.
The borrower and the process
Cautious lending policies introduced in the wake of the global financial crisis have certainly taken their toll on self-employed borrowers.
In today’s climate, while there are different loan options available for self-employed borrowers, an individual applicant will not necessarily have access to all of them. Applying for the right loan with the right lender is therefore crucial.
For those who can produce documentation covering their income and assets, a full documentation (‘full doc’) loan will generally be the most straightforward way to secure finance.
To qualify for a full doc loan, you will need to provide your lender with your past two tax returns. These will be used to verify your income as you won’t have upfront pay slips or group certificates like a PAYG employee, if you have been self-employed for at least two years.
The lender will generally use the lowest taxable income from the two, the current year’s income, or an average of the two plus a percentage change between the two years, to calculate your assessable income and determine whether your application is approved.
Before you apply for a full doc loan, however, you should also ensure you are able to produce some additional records, including profit and loss statements, a list of all investments and their market value, and information on any debts, as your lender will most likely ask for these too.
Even though producing these documents will be time consuming and will call for you to be organised long before you apply for a mortgage, a full doc loan is generally the best option for a self-employed borrower.
This is especially so when compared to the rigmarole of applying for a low doc loan.
The lowdown on low docs
As a self-employed borrower, if you think you are unlikely to meet the stringent requirements of most lenders, you will almost certainly have to resort to option B – the low documentation loan – as a means to secure finance.
A low doc loan can be a great alternative if you can’t provide up-to-date tax returns or financial statements as you will have several options, other than those required for a full doc loan, to confirm your income.
Requirements vary depending on the lender but generally, self-employed borrowers will need both to have been in business and to have held an ABN for at least two years to be considered.
It’s also worth noting that a low doc loan application will still require some form of income statement, usually a signed declaration.
Some lenders may even require your Business Activity Statements as further evidence of income, while others may ask for trading statements or a letter from your accountant.
Another thing to consider before applying for a low doc loan is that in many cases the interest rate charged may be higher because lack of income verification is perceived to heighten a lender’s risk.
This is not the case with all lenders, however, and often there will be no difference between the interest rates charged for a low doc and for a full doc loan.