Self-employment has its rewards. Self-employed contractor and freelancers get to decide on their own work hours, not being tied down by a company’s strict rules and guidelines. Too often too, self-employed individuals get higher pay than regular employees. But once you start looking to secure a home loan, then you begin to see the disadvantages of being self-employed. Traditional creditors are mandated to look at employment as a basis for loan approval.
Currently, it is very difficult and close to impossible to secure self employed home loans. Self-employed individuals are easily frowned upon by lending companies, regarded as not having a “stable” source of income. Lending companies have traditionally looked at self-employed people as a potential risk in terms of debt repayment. They require borrowers to be employed in a company for a minimum number of years before they can even be considered for loan approval.
Luckily for self-employed individuals, there now are specialist lenders that have turned away from the traditional manner of evaluating their capacity to pay debts. These companies will evaluate details of the income history of the self-employed individual, instead of immediately turning down the loan applicant simply because they do not have an “employed” status. Self employed home loan can be availed either through a Full Doc loan or a Lo Doc loan. In Full doc loans, the borrower furnishes proof of income such as tax returns of the two previous years. If you are able to provide proof of income to the lender, it would be much easier for you to secure a home loan. For self-employed borrowers who do not have tax returns for the previous years, the Lo Doc is the alternative.
Self-employed borrowers may choose to secure a home loan via a low doc loan system, where less documentation is required for loan approval. However, due to the recent economic crisis across the globe that had been caused by irresponsible handling of mortgages in core countries, tighter rules have been enforced in approving lo doc loans. The Federal Government has made new guidelines as to how lenders are to approve loans for self-employed individuals. Under the new rules, lenders should not fully trust the word of a self-employed borrower, but they should require some form of documentation to verify the pronouncements.
If you are self-employed and are looking to secure a home loan, the best thing to do is to get as much documentation as you can to prove your income generation. That way, you will have better chances of getting a loan. These documents may include bank statements, your Business Activity Statement (BAS) or other documentation showing you earn on a regular basis.