How to get a home loan when you're self-employed

If you work for yourself or are in the ‘self-employed’ category, applying for a home loan can be a challenge even when you have a regular income. It’s still possible to get approved for a loan, but you might need to put a bit more effort into your application.  

Here’s what you need to know about applying for a home loan while self-employed. 

Why do lenders view self-employment differently? 

Lenders are more specific in their requirements when dealing with business owners and sole traders. Historically, these types of borrowers have defaulted more often than pay-as-you-go (PAYG) employees or those paid a regular salary. 

At loans.com.au, we consider someone self-employed if they receive more than 50% of their income, including wages, from a business where: 

• They are the sole trader, a partner, director, or shareholder 

• They have management control of the company 

If you’re self-employed, it doesn’t mean that you’re unlikely to get a home loan. You just need to show lenders that you’re financially capable of making your repayments. 

What will lenders ask for? 

As long as you can prove that you can make your repayments, you’ll have a good chance of getting your loan approved. Get your documents ready to show that you’re financially capable of paying back the loan. 

Lenders want to see consistency in your income. You can ask an accountant or a broker to help you document your tax returns and other finances. Make sure that your income tax returns are lodged with the Australian Taxation Office (ATO), as well. 

 At loans.com.au, self-employed borrowers need to provide: 

• Full personal tax returns with corresponding ATO Tax Assessment notices of the past two financial years 

• Full business tax returns for the past two financial years 

• Full financial statements for the business signed by the borrower’s accountant such as: 

  • Balance sheets 

  • Profit and loss statements 

We may make exceptions to the requirements above for cases such as a borrower who has only been trading in the current business for 12 months. Talk to our lending specialist to discuss your circumstances and your goals for your loan. 

What are lenders looking for in tax returns? 

Lenders need to look at your tax returns so they can clearly gauge your financial situation. First, lenders will verify the tax return you provided them is the same as the one you’ve submitted to the ATO.  

Once the lender has verified your tax returns, they’ll look at the details of your documentation to figure out your financial status. This includes checking add-backs and matching them up to your regular business expenses. 

Add-backs are expenses that aren’t recurring expenditures but still affect your taxable income. Take note, that these expenses don’t reduce your actual income. Some add-backs that lenders may consider are: 

• One-off expenses 

• Net Profits Before Tax 

• Interest on business or personal loans 

• Depreciation on taxable assets 

• Income that is distributed through a trust 

How do lenders calculate my income? 

Every borrower is in a different situation especially if they’re operating their own business. Usually, lenders calculate your income based on your tax returns and other financial information you’ve provided. They use your tax returns to estimate how much your regular income is and would be.

Lenders may base their estimates using your lowest income figure or your more recent tax return. There are instances where it’s more appropriate to look at your whole history while you’re self-employed to create a more accurate estimate of your income. 

What if I only recently became self-employed? 

Borrowers who have been self-employed for less than two years may find it harder to get a home loan. Most lenders don’t typically accept home loan applications from those who have not been self-employed for a long time. 

However, at loans.com.au we may make certain exceptions for those who have recently become self-employed. For example, borrowers who only have 12 months of trading in their current business but have two years in previous PAYG are employed in a similar occupation or field.  

If you’re unable to show two years’ worth of tax returns and other relevant financial documents, it’s best to get in touch with our team of lending specialists.  

What can increase my chances of approval if I'm self-employed? 

Here are some tips and tricks to help get your loan application approved: 

Boost your deposit 

A healthy deposit amount can increase your chances of qualifying for a home loan. It shows the lender that you’re a lower-risk borrower and that you’re financially disciplined. Generally, putting down 20% or more of the value of the property is ideal. This also gives you the benefit of not having to pay for expensive Lender’s Mortgage Insurance. 

Prepare a list of your assets 

Gather you're at least six months’ worth of bank statements to confirm your savings or term deposits. Other assets may include investments like stocks and rental properties. If you already have an existing property, you can use your equity when you apply for a loan. 

Maintain a high credit score 

Self-employed or not, a high credit score is a good way to increase your chances of qualifying for a home loan. Lenders will also inspect the credit history of your business so ensure your business’s credit score is healthy too. 

If you find yourself with bad credit, you can still improve your credit score by sorting out any unpaid debts and making sure that you continue paying your debts on time. You can also check your credit score from your provider to make sure there are no mistakes. 

Looking to finance your house when you’re self-employed may take a little more work and preparation compared to being an employee. However, getting your home loan approved is still possible if you have your financial documents ready to prove your income.  

If you are ready to get started on your application, call our friendly staff or chat online with a lending specialist. 

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