How to Get a Mortgage Being Self-Employed

Getting a mortgage is a difficult process for anyone. Gathering proof of income is one of the most important steps in proving that you can pay back your mortgage, but this may be difficult for self-employed people. Self-employed people do not have regular payslips that they can provide as proof and have to instead provide personal and business tax returns. So how can we make this process easier?

Who Is Most Likely to Be Affected by This Problem?

26% of Australians who have been refused a mortgage say that their self-employment is the reason, according to Pepper Money in their 2017 report. With a growing number of people leaving traditional employment and becoming freelancers and contractors, the rate of self-employed people is expecting to grow and this will likely cause the banks and other traditional lenders to change their criteria for who can be approved for a mortgage and what supporting documents they must present.

At the moment, however, the rules and requirements for a mortgage from a traditional lender are unchanged. This means that self-employed business owners and the growing freelance community still need to meet the banks’ policies. If you are unsure about these policies, it is a good idea to engage the services of a mortgage broker. If you are a first time home buyer or want to use a guarantor to purchase your property, this guide from Blutin Finance, a mortgage broker in Melbourne, will help you learn more on what a mortgage broker can do.

How Likely Is a Self-Employed Person to Get a Mortgage?

If a self-employed person can show that he meets the usual requirements that are necessary for applying for a mortgage (income, affordability, etc.), there is no reason that the applicant would be turned down. However, due to not being able to show payslips, there may be challenges.

A simple checklist of how to improve your chances is: complete your tax returns, show your profits, and show things simply!

Completing Your Tax Returns and Keeping Them Up-to-Date:

A formal tax return is the only proof of income that is available to most people who are self-employed, so you will have to show at least one (but preferably more) that shows what you have earned during that financial year.

Ideally, you will want to present two years of tax returns to show that you have a consistent income and that you pay your taxes on time. If you only have one, in theory, banks should accept that as legitimate proof.

Tax returns are the only documents to prove income with a lender, so if you have late payments regarding your taxes then they are unlikely to think you would be suitable for mortgage repayments.

Show That You Are Making a Profit:

A lot of self-employed applicants worry about the consistency of their income over a short period; weeks of huge profits and then weeks of lower income. However, this is less of a concern than it seems.

Potential lenders will be more concerned with the annual profit and consistency of the income over two years rather than what the income or profits are on a weekly basis. In presenting tax returns, you can improve your chances by showing twenty-four (24) months worth of income and profits. This will show the overall profitability of the business as opposed to months of “lumpy income”.

Make Information About Your Business Easy to Understand:

Lenders are trying to mitigate risks when lending money to people and are looking to maximise their profit. This is true whether it is a traditional bank or a non-bank lender. If you can make your income stream and the overall health of your business easy to understand, then they are more likely to trust you.

If you are a sole trader (such as a freelance writer or a programmer working independently), your earnings will be easily verified by the way of your personal annual tax return. Even though it may come from multiple sources, it all ends up in your pocket. This can be presented easily and likely save a potential lender a lot of time.

If you are part of a partnership or another business where you have less than 50% stake in the company, you may have a much more complex task ahead of you. If your income stream is hard to explain, you may need to find a specialist lender or a mortgage broker who is used to dealing with business people in similar situations to you. The lenders may ask for a larger deposit or higher rates.

Conclusion

Getting a mortgage as a self-employed individual is not impossible, but there are challenges ahead. To increase the chance of your application approval, you may want to:

• keep your finances under control,

• simplify the explanation structure of your business, and 

• show your business is consistently profitable.