12 Tips for Self-Employed Mortgage Applicants
Securing a mortgage when you’re self-employed can feel like navigating a maze. While it might seem more challenging than for those with a steady paycheck, it’s far from impossible. With the right preparation and knowledge, you can significantly improve your chances of getting approved for a home loan. Here are some essential tips to help self-employed individuals navigate the mortgage application process.
1. Understand the Lender’s Perspective
Lenders are primarily concerned with your ability to repay the loan. When you’re self-employed, your income may be less predictable than that of a salaried employee. This perceived risk means lenders will scrutinise your application more closely. Understanding this perspective can help you prepare a stronger application.
2. Gather Your Financial Documents
Documentation is key when applying for a mortgage as a self-employed individual. Most lenders will require:
- Two years of financial statements
- Two years of tax returns
- Business activity statements
- Bank statements (personal and business)
- Proof of any other income sources
Some non-bank lenders may accept alternative documentation, such as an accountant’s declaration or business bank statements, especially if you’ve been self-employed for less than two years.
3. Maintain Clean Financial Records
Keeping your personal and business finances separate is crucial. This separation makes it easier to demonstrate your income and expenses clearly to lenders. Additionally, ensure all your tax obligations are up to date. Any outstanding tax debts can significantly hinder your mortgage application.
4. Boost Your Credit Score
A strong credit score can offset some of the perceived risks associated with self-employment. Pay all your bills on time, reduce outstanding debts, and avoid applying for new credit in the months leading up to your mortgage application.
5. Consider Your Debt-to-Income Ratio
Lenders use your debt-to-income ratio to assess your ability to manage monthly payments. Try to pay down existing debts before applying for a mortgage. This will improve your debt-to-income ratio and potentially increase the amount you can borrow.
6. Save for a Larger Deposit
A larger deposit can make you a more attractive borrower to lenders. It reduces the loan-to-value ratio (LVR) and demonstrates your ability to save. Some lenders may require a higher deposit from self-employed applicants, so aim for at least 20% of the property’s value if possible.
7. Work with an Experienced Mortgage Broker
A mortgage broker experienced in dealing with self-employed applicants can be invaluable. They understand the nuances of different lenders’ policies and can guide you towards those more likely to approve your application. They can also help you present your financial situation in the best light.
8. Consider Non-Bank Lenders
While traditional banks may have stricter criteria, non-bank lenders often offer more flexible options for self-employed borrowers. Some provide ‘low doc’ loans that require less documentation than traditional mortgages. These loans may come with higher interest rates, but they can be a good option if you’re struggling to meet standard lending criteria.
9. Demonstrate Income Stability
If possible, try to show a stable or increasing income over time. If your income fluctuates, be prepared to explain any significant variations. Lenders want to see that your business is viable and that you have a consistent ability to repay the loan.
10. Be Honest and Transparent
Transparency is crucial when applying for a mortgage. Be upfront about your financial situation, including any challenges your business may have faced. Lenders appreciate honesty and are more likely to work with you if they understand your full financial picture.
11. Plan Ahead
If you’re planning to apply for a mortgage in the near future, start preparing now. This might mean adjusting how you structure your finances or delaying major business expenses. The more time you give yourself to prepare, the stronger your application will be.
12. Consider Timing
If you’ve recently become self-employed, you might need to wait before applying for a mortgage. Most lenders prefer to see at least two years of financial records for self-employed applicants. However, some may consider applications after one year of self-employment, especially if you have a strong financial position.
Securing a mortgage when you’re self-employed may require more effort and preparation, but it’s certainly achievable. By following these tips and working with experienced professionals, you can present a strong case to lenders and increase your chances of approval. Remember, every lender is different, so don’t be discouraged if one turns you down. With persistence and the right approach, you can find a mortgage that suits your needs as a self-employed individual.