Self-employed borrowers come up against the challenge of not being able to simply present payslips and tax returns to back up their loan applications. But this need not stop you buying your dream home.
Many lenders offer loans for self-employed borrowers who can’t hand over payslips and employment records. This means that, rather than the usual documentation, you prove your ability to service a loan using bank statements, declarations from your accountant and financial records.
Of course, as with any mortgage application, you must still prove that your income outstrips your spending and you can service the loan. Getting this right is more than presenting a lender with a few quick sums on the back of a napkin; it can take a solid six to 12 months of preparation.
Here are some quick tips:
Loans to the self-employed do differ from standard loans in a few ways, apart from the application process. Lenders offset the extra risk they are taking when lending to a self-employed borrower or contractor by charging slightly higher interest rates and placing some extra rules on loan-to-value ratios (LVR) and insurance requirements.
Generally, you can expect an interest rate for such a loan to be one to two percentage points higher than for a full-documentation loan.
Most lenders will also insist on an LVR of no more than 80 per cent – meaning that under no circumstances will they lend more than 80 per cent of the property value, as assessed by the lender.
In cases where the loan amount is for more than 60 per cent of the property’s value, some lenders also require self-employed borrowers to pay for lenders’ mortgage insurance.