Getting a Home Loan Is Different If You Are Self-Employed

April 18, 2012 by  Filed under: Loans 

When it comes to qualifying for a home loan, banks and other lenders generally want to lend to the least risky applicants possible. This means evaluating each borrower’s financial health, including savings, debt, employment history and earnings. If you are self-employed, this assessment can be problematic because many self-employed individuals do not have a set salary and their income tends to fluctuate with the health of the economy. But this does not mean that it is impossible to get a mortgage if you are self-employed or have a home business. Below are some important tips for improving your chances of finding a home mortgage if you are self-employed.

Assess your financial health.

Before any bank will consider lending you money to buy a home, it will want to make sure that you will be able to repay the loan on-time and in-full. If you are self-employed, that means making sure that your business provides you with regular and adequate income to cover your personal living expenses and the loan amount. You probably have a good idea about how much your business makes in general, but now is a good time to sit down with your accountant or financial planner and discuss your company’s long-term prospects and how your income from that business will appear to would-be lenders.

Amass your personal and business economic records.

Once you have determined that your income is likely to satisfy a mortgage lender, you need to compile the documentation to actually prove your worth. Most banks and lenders will require several years of personal tax returns and other financial data as evidence of your ability to repay the loan over time. If your income has fluctuated greatly over the past several years, you may need to work with an accountant or mortgage broker to justify any particularly “lean” times, such as months when you made large one-time purchases of equipment.

Determine your borrowing power.

As with any mortgage, you need to determine how much it is reasonable for you to borrow, given your financial situation. There are many different types of loan products available, and factors other than borrowing power will influence which type is best for you. After you know how much you can borrow you can start shopping around for the best product and mortgage rate possible.

Consider an alternative loan product.

If your financial situation is particularly complicated, you may want to consider applying for a so-called “low documentation” loan. As its name suggests, you do not need to show as much financial documentation to obtain this type of loan, but the interest rate is likely to be higher and you may be subject to additional limitations. If you start out with a low documentation home loan, it is possible to refinance to a lower-interest traditional mortgage when your financial situation changes.

Tomorrow Finance provides tools to compare home loans from Australia’s lenders. When you find the best home loan rates, you save!

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