Being self-employed provides many advantages to your career and life. Accountability, opportunity, work-life balance, satisfaction, remuneration. All of these are up to you to control. However, it can make getting a home loan more complicated. Here’s some tips on how to be ready for a loan application when you’re self-employed.
Unallocated income: What lenders look for when you’re self-employed
Lenders look for eligible and available (unallocated) income as the main financial measure with which to determine your borrowing capacity. They also look at your deposit but that’s a separate assessment. Unallocated income is your eligible income less mandatory and discretionary living expenses and other financial commitments. Without deep diving into what constitutes mandatory and discretionary living expenses and how lenders view ongoing liabilities (i.e. other loans, credit cards, Buy Now Pay Later accounts, HECS debts etc.), if we assume all those costs are $X, then your unallocated income ($Z) is $Y – $X, where $Y is your eligible income.
Your broker is key in preparing a finance application such that you can maximise your unallocated income, $Z.
For self-employed applicants, there are 3 P’s that are critical to ensuring we can maximise your unallocated income.
1. Policy
Credit Policy is specific to each lender, and they vary considerably. What one lender may accept another won’t. Being able to navigate credit policy is a core skill your broker should have.
Thankfully, brokers have access to credit policy through their accreditation with lenders and also have the ability to discuss policies with lenders’ Business Development Managers and Credit Managers. It is next to impossible for individual applicants to know or be expected to know the credit policy of their existing lender, let alone 20 others especially in such a dynamic environment. The sooner you discuss with your broker your needs and objectives, the better they will be able to find lenders with suitable credit policies and then determine which lender also provides the best match of products, services, features and rates.
2. Planning
Planning should be a core competency of any self-employed person. And it can’t be stressed enough how important planning is for self-employed lending. Where Pay As You Go (PAYG) employees can present their most recent payslip to a lender, self-employed applicants provide their previous years (in fact most lenders require 2 years) tax returns and financial statements.
Therefore, getting a loan today relies on seeing how your business was going up to 3 years in the past. The reason for this is quite simple. Lenders can only consider income based on what has been submitted for tax purposes. Work in progress, future income etc. is not eligible (refer to the discussion on policy) and therefore all self-employed applicants need to carefully plan their revenue and expenses knowing they will be relied upon for future finance applications.
3. Preparation
Preparation of your financial documents is critical. Without them no lender will consider your application for Full Document loans, which enable you to get the most competitive rates and lending criteria. You need to have your Company and Individual tax returns completed as well as Financial Statements for the two most recently completed financial years (ending June 30).
Some lenders only require one year’s financials for full doc lending (your broker can help advise you on this), and if these lenders are suitable from other credit policy requirements. Don’t leave your accounting and tax preparation on the To Do list. Work closely with your accountant (planning) and prepare your financial documents in a timely fashion. This will ensure your broker can access the information needed for your application to succeed.
Next steps…
Being self-employed brings many rewards and can be incredibly satisfying. It can however make life more complex, especially regarding home loan finance. Being prepared, planning for your application, and having your broker understand the policy landscape is critical to ensuring you can achieve the best possible outcome.
