Are you self-employed and need a home loan?
You may be wondering if you should take out a low doc loan or a traditional home loan? The answer depends on your individual situation. Both options have pros and cons, just as every lender has different lending policies. Some lenders are more open to receiving self-employed home loan applications than others.
As your mortgage broker, we know who these lenders are and the criteria and documentation you’ll need to give your application the best chance for success.
If you take the low doc home loan path, consider this:
Know that it is unlikely you will be allowed to borrow more than 80% of the value of the property and you will probably pay Lenders Mortgage Insurance (LMI) if you are borrowing over 60%. Most lenders will not allow a refinance over 60% on a low doc and some may limit purchases to 60%.
You may also be charged a slightly higher interest rate to account for the extra risk that some lenders associate with self-employed borrowers who are not able to show evidence of a stable income.
The benefit of a low doc loan is that it is quick because it requires significantly less documentation. Every lender’s policies are different, but many require you to supply a Business Activity Statement (BAS). This will help assess whether you’re able to afford the loan. Other common document requests include previous bank statements and a letter from your accountant.
Since the global financial crisis, the low doc loan paperwork requirements have become more robust but it is still possible to find lenders whose only requirement is for you to sign a certificate that you earn sufficient income to comfortably afford the loan repayments.
Once you manage to obtain completed financials that meet the lender’s criteria, you can always apply to a lender to change to a full doc loan. This will reduce your interest rate in most cases.
If you go for a traditional home loan, consider this:
Most lenders will ask you to provide two years lodged tax returns and assessment notices. Reviewing these documents are the lenders way of verifying traditional income for self-employed borrowers. These are required if you wish to apply for a full doc home loan.
Some lenders assess self-employed applications by using the average of the last two years’ income, while others use a variance strategy or they take the lower of the last two years taxable income. Some of our lenders are becoming more understanding and accept only 1 years tax and assessment notices. This will still always come down to demonstrating affordability to your broker and the lender.
Plan ahead and discuss your specific needs with us, we can give you an idea of how much you might be able to borrow before a formal application process even begins. To chat, just call us on 1300 652 842.