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Buying a home when self-employed

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Published: 14Apr2006
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Small businesses and self-employed individuals are what drives much of the Australian economy, yet self-employed home buyers face unique challenges when trying to qualify for a mortgage. In particular, the paperwork requirements are typically substantial, since self-employed persons do not have the same easy proof of income others do. When you work for somebody else, simply bringing in a check stub or statement from your employer is proof enough, but if you are self-employed, this isn't a possibility. Lenders must guard against fraud, and protect themselves against self-employed borrowers who overstate their income. This is why lenders will either require either an almost unmanageable amount of paperwork and verification, or a significantly higher than average down payment. Also, stated taxable income is often kept to a minimum as self-employed persons and their accountants take advantage of every deduction possible. Self-employed persons may also find it difficult, or even impossible, to separate their personal and business finances. If they have not been self-employed for a long time, up-to-date financial statements may not yet be available.

Banks have become more willing to work with self-employed individuals, and recognize that many such persons earn incomes far above the national average. Median self-employed incomes vary by state, but as an example, a PayScale survey (http://www.payscale.com/salary-survey/aid-9542/raname-SALARY/fid-7636) reports that the average self-employment income in the ACT is $46,633.

Fortunately, many lenders have special programs that offer a simpler option for self-employed individuals. Low documentation loans are specifically designed for those borrowers who find it difficult, because of reasons of self-employment, to comply with the usual requirements for income verification. A low documentation loan requires a borrower to complete a declaration of their financial situation. The declaration is a simple form which allows the borrower to make a statement regarding their income, without having to provide evidence. Good credit and a high down payment is usually required to obtain a low documentation loan. Because there is a high down payment requirement, lenders mortgage insurance will typically not be required.

While there are many mortgage products in Australia that require just ten percent down, a low documentation loan will usually require the borrower to have a substantial equity stake, in some cases 40 percent or higher. If you qualify for the First Home Owner Grant (http://www.firsthome.gov.au) however, some banks may be willing to count this grant towards the down payment. National Australia Bank (http://www.mortgagemall.com.au/national_bank_home_loans.html) was one of the first banks to start offering low-documentation loans to self-employed borrowers, offering a package that does not penalize self-employed individuals with higher fees and interest. NAB's low-documentation loan product comes in the same variations as any other standard loan, and you can choose from fixed and variable interest rate options.

Some sub-prime lenders, such as Liberty Financial (http://www.liberty.com.au), also provide low-documentation loans for self-employed. Liberty's Nova program is designed specifically for self-employed borrowers, and it also includes a Jumbo option for high net worth self-employed persons, offering loans up to $10 million.

Although most lenders do require a significantly higher than average down payment, in some circumstances, you may be able to find a low-documentation loan for as little as 20 percent down payment.

Tracey Anderson is a mortgage broker with 16 years experience in the Australian mortgage industry. For personalised information from leading independent brokers, visit http://www.mortgagemall.com.au

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