The world is a tough enough place when you decide to become a small trader or start a small business. The challenge of establishing a reputation for quality and reliability is only matched by the fear of not finding enough customers to pay the bills. The first two years are usually the toughest, too.
But nothing can match the challenge of being self-employed and trying to get a home loan for a residential or buying an investment property. Lenders are reluctant to give their money to anyone who isn’t in a steady job with a reputable (and preferably large) employer in a stable industry.
It’s a solid policy for lenders – at least in theory – because it’s easier to check a prospective borrowers’ financial situation. Being in a steady job at an established company also means borrowers are more likely to make regular mortgage repayments. At least as far as most financial institutions are concerned, people in stable, permanent jobs are a better risk that those who do short-term or contract work.
To secure a traditional home loan, you usually need to provide tax returns over three years to prove you have a steady income. Often self-employed people don’t have this level of paperwork, particularly if they have only recently started their business. Thankfully there are products requiring less documentation – called low doc home loans – that cater for this growing market segment.
We believe that anyone with a good credit history and a steady income should be able to get a home loan, regardless of their employment circumstances.
Anyone who starts a business – including sole traders – is entitled to have a Australian Business Number (ABN). By applying for an ABN, you’re also able to register for GST and able to apply for other business registrations. It also, potentially, makes it easier for you to get a home loan.
As you are a borrower who is self-employed, your lender might have trouble assessing your finances. This is why they need an ABN to prove that you’re working and collecting a steady stream of income.
Although sole traders are eligible for regular home loans, lenders have a special set of rules that apply to ABN holders compared with regular borrowers.
You will likely be required to pay a minimum of 20% deposit when the lender approves your home loan. This will also help you avoid paying Lenders Mortgage Insurance (LMI).
You will also need to have held your ABN for at least two years. This proves that you’ve been in business for long enough to have gained some financial stability. The ABN needs to be the same one you use to pay GST.
Some lenders will make an exception if you’ve held your ABN for less than two years. Sole traders who continue to work in the same industry they worked in before starting their own business, for instance, may only need to have held their ABN for one year.
Lenders will also be sympathetic to those applicants whose companies have undergone restructuring. This may have changed their ABN but not the essence of their work. If this situation applies, you will need to provide evidence of your old and new ABN.
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Get Started ### How do I get a low doc home loan?
To be eligible for a low doc home loan, you will need to have had your ABN for at least two years. It’s also important that you have a clean credit record.
Lenders will still need to be comfortable that you can meet your repayments. They will generally want evidence of income, but may have different documentation requirements. They may ask you for:
You will also need to provide some basic information about your business, such as its name, ABN and GST details.
Because of the inherently higher risk associated with these arrangements, low doc loans tend to have higher best home loan rates, fees and charges. You might also be liable to pay LMI if you’re borrowing more than 60% of the property’s value.
See here for more details on how to get a low doc loan.
In some cases, you can get a low doc loan even if you don’t have an ABN. You have three potential options:
Speak to one of our experts to find out more about these.
If you’re getting a low doc home loan and don’t have an ABN, you’re likely to pay an even higher interest rate than if you do. Lenders will determine this based on your circumstances (and they will be particularly interested to know why you don’t have an ABN).
Those without an ABN are less likely to be successful when applying for an investment loan. As a rule, lenders don’t see investing as a form of self-employment in these circumstances. The same applies if you’re a beneficiary to a trust – in this situation, you’re unlikely to be a candidate for a low doc home loan.
Here at UNO, we have the skills and the know-how to help you with your home loan needs. Before applying for a low doc loan with or without an ABN, you should:
This information is general in nature and you should always seek professional advice when making financial decisions.