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Self Employed Home Loans

Self employed home loans can be tricky as lenders have vastly different policies that apply to the self employed than otherwise apply to wage earners.

 

As well as this, lenders regard tradesmen who sub contract as self employed and it puts these people at a disadvantage to those tradesmen that are employed.

 

People who also earn more than 50% of their income from commissions are often also treated as self employed by lenders.

 

The confusing aspect of all of this is that every lender has different policies when it comes to the self employed and shopping around to find the right one can destroy your credit file!

Trading Figures

 

This is one of the biggest areas where there is a huge variation between lenders and this can be significant.

 

There are a few lenders that are happy to look at just one year’s financials and rely on that but these are few and far between. This can also depend on the LVR.

 

The majority require two years financials but even these lenders have different approaches to working out what income can be used – some average the two years figures, some use the lower of the two and some work on the lower of the two with a 20% increase.

 

This can be particularly difficult for a business that has only been operating for a few years as you would expect that the income would increase substantially during this early growth period.

 

All very confusing and it can make  a huge difference to the amount that you can borrow – especially if the net profit for the business has varied significantly from one year to the next.

 

Add-Backs

 

We all know that an accountants job is to make the most of deductions but this can sometimes hamper you when it comes time to borrow. This can sometimes be overcome to a certain extent as lenders will allow you to “add-back” some expenses but the policies vary incredibly from lender to lender and this can make a huge difference to the amount that you can borrow.

 

The variation between lenders in what they will accept as an add-back is huge. Some will accept depreciation – others don’t, some will include disbursements from Trusts that are paid to children and some will allow add-back of one off expenses. Even those that will accept depreciation have different rules – some lenders will allow the whole depreciation to be used whilst others will limit it to 20% of the gross profit.

 

One of the quirks that one lender has that can make a huge difference is that they will increase the income that would otherwise apply by $5,000 if there are motor vehicles expenses shown on the Profit & Loss and this can make a huge difference.

Low Doc Loans

 

Most people have heard about “Lo Doc” loans being available for self employed people and although these are vastly different to the “Lo Doc” loans of the past, they can still be useful if you haven’t done your tax returns.

 

Income still needs to be verified but this can be done with less traditional methods either by the provision of Business Activity Statements (BAS), bank statements and an accountants declaration.

 

The ABN for the business generally needs to be registered for a minimum of 2 years with a small number of lenders accepting a shorter term.

 

Any low doc loan that involves borrowing more than 60% of the value of the property will also require Mortgage Insurance.