How to get a home loan if you’re self employed

by Chris Lang on March 30, 2012

Self employed applying for a home loan

Being self-employed has its benefits. You get to be your own boss and work in your PJ’s if you like. But when comes the moment where you need a home loan – you grunt and groan and wish you were a regular employee.

And the reason lies in the way lenders assess your income. All a regular employee is required to produce as proof of income is their pay slips. Whereas a self-employed person or a business owner needs a truckload of paperwork (often dating as far as two years back), not to mention all the time involved in preparing all the letters, statements and tax returns.

But getting the paperwork ready is the least of the problem – getting the loan approved is the big issue. Being self-employed means you must have an accountant, right? And many people don’t have “just an accountant” – they have a very good accountant. One that goes overboard on minimizing (perfectly legally of course) their taxable income while preparing the tax returns. Doing so achieves one goal for you – paying less tax, but at the same time it hurts your chances of getting a mortgage, by making it look like you earn less than you actually do.

Not many people know that some deductions your accountant claims on tax can be added back into your earnings, to demonstrate your true capacity to pay off the debt to your lender. The way “adding back” works, is it doesn’t affect your tax return but only affects what the lender will consider an additional part of your income.

What can be added back? Some expenses that you have incurred, that reduced your taxable income, but that are not ongoing. For example, voluntary superannuation contributions, extraordinary one-off expenses, net profit before tax (for company owners who have profits that were retained in the company), or tax distributions (if your business operates as a trust and you distributed some income to family members).

Another useful piece of information not generally available is that all lenders assess your income differently. There are more popular methods – such as calculating the average income using the last two years you were in business, but there are also other (even if less popular) methods – such as assessing your most recent year’s income. Very often the averaging method puts you at disadvantage, if most recent year is your best, or if you have only been in business for one year. So if your best hope is to get an assessment based on just one year – you can try and find a lender who does it.

Adding back or getting assessed by just one year’s income are instantaneous attempts to solve the low income problem, however a better approach would be to plan ahead. Deciding on purchasing a home and working with your accountant well in advance to the purchase will help you have all the necessary documents in order, when you need them. Armed with tax returns portraying your borrowing capacity in the best possible light you will be in a very good position to get that loan!

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