Mortgage strategies for self-employed borrowers

4 mins
Updated
December 20, 2024

Obtaining a mortgage as a self-employed individual can feel daunting, but with the right preparation and strategies, it’s entirely achievable. Lenders evaluate self-employed borrowers differently than salaried applicants, often requiring additional documentation and a thorough assessment of income stability. This guide provides key insights and strategies to help self-employed individuals secure a mortgage successfully.

Understanding how lenders assess self-employed borrowers

Lenders aim to gauge the financial stability and reliability of self-employed applicants by analysing:

  • Income consistency: Lenders prefer steady and predictable income streams over fluctuating earnings. Self-employed borrowers often need to demonstrate stable income over at least two years.
  • Business health: The financial health of your business is a critical factor. Lenders may evaluate revenue trends, operating expenses, and profit margins to assess whether your business can sustain your mortgage payments.
  • Debt-to-Income ratio (DTI): Your DTI, calculated by dividing monthly debt payments by monthly income, is used to determine your ability to manage additional debt. A lower DTI improves your chances of approval.

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Essential documentation for self-employed borrowers

Self-employed applicants must provide comprehensive documentation to substantiate their income and financial health. Commonly required documents include:

  • Tax returns: Lenders typically request personal and business tax returns for the past two years. Ensure they are accurate and complete.
  • Bank statements: Personal and business bank statements can verify income and demonstrate cash flow consistency.
  • Accountant letter: A letter from your accountant can confirm your income and business details, adding credibility to your application.
  • Contracts or invoices: Providing recent contracts or invoices can highlight ongoing income sources.
  • Profit and loss statements: These offer insights into your business’s financial performance and should align with your tax returns.

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Strategies to improve mortgage approval odds

Self-employed borrowers can enhance their mortgage prospects by adopting the following strategies:

  • Organise your financial records: Maintaining accurate, up-to-date financial records is essential. Work with a qualified accountant to ensure your tax returns and financial statements accurately reflect your income and expenses.
  • Build a strong credit profile: A high credit score boosts your credibility as a borrower. Pay bills on time, reduce credit card balances, and address any discrepancies in your credit report before applying.
  • Increase your deposit:  Saving for a larger deposit reduces the loan-to-value ratio (LVR), lowering the lender’s risk. A deposit of at least 20% can help you avoid Lenders Mortgage Insurance (LMI) and improve your chances of approval.
  • Reduce existing debt: Paying off existing debts improves your DTI and demonstrates financial responsibility. Focus on clearing high-interest debts first.
  • Establish a consistent income pattern: Lenders favor consistent and reliable income over sporadic high earnings. If possible, structure your business to ensure steady monthly revenue.
  • Prepare to explain fluctuations: If your income varies seasonally or has dropped temporarily, provide a clear explanation and evidence of recovery. Supplementary documentation, such as contracts for upcoming work, can be helpful.

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Alternatives to traditional mortgages

For self-employed individuals facing challenges with conventional mortgages, alternative options include:

  • Low-doc loans: These require less documentation but may come with higher interest rates or stricter terms.
  • Specialist lenders: Some lenders specialise in working with self-employed borrowers and may offer more lenient criteria.
  • Guarantor loans: A guarantor can provide additional security, improving your approval chances.

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While securing a mortgage as a self-employed borrower may involve additional steps, it’s a realistic goal with careful preparation. By organising your financial records, demonstrating consistent income, and seeking expert guidance, you can improve your chances of approval and secure a loan that fits your needs. Proactive planning and clear communication with your lender are key to achieving your homeownership dreams.

Disclaimer
Prepared by Beck McLean Finance Pty Ltd ABN 80 632 809 833. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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