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Home loans for self-employed

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As a self employed borrower, the Structure you present to a potential lender can vary greatly from a simple sole trader to complex groups involving several individuals, companies and trusts.  So how does this impact the way in which you can access a loan? 

Banks assess self-employed applicants in the same way that they assess applicants who work in a job; apart from offering suitable security, you must demonstrate you can afford to repay the loan without financial stress.  In practice though, assessing a self-employed borrower is a much more complex process, adding another layer of risk for the bank.  As a result, lenders will seek more detailed information about your applicantion.  

To assist the process and provide the the best chance of securing the funds you're looking for, you should be aware of the following issues.

1. Income Assessment

This is the toughest hurdle for a self-employed applicant to cross.  Lenders prefer well-established businesses with a track record and profitability. Generally speaking, they do not rely on forecasts and base their assessment on historical figures to measure the performance of the business.  This means they will require your two most recent individual tax returns along with the two most recent returns for your business entities.  A lender will use these to analyse the income, profit and cash flow trends for the business and you as an owner. After all, they are trying to establish that you can repay the loan you have requested.  This can make obtaining a loan difficult if you are a new business or if you have undergone a recent restructure. 

2. Loan Security.

Home loans and residential investment loans are secured by residential property.  This applies to both PAYG applicants and self-employed applicants.  When lending to a company, lenders are likely to tie the directors of the company to the loan via personal guarantees.  Guarantees will also be used when a loan is requested in the name of company directors but the application relies upon income from their trading company. 

3. Credit Reports.

A credit check is undertaken as soon as the application is received. Lenders consider the personal credit history of the applicants and also report on each of their business entities . The credit reports give lenders guidance on the structure of the business and will influence what additional information they seek.  That can lead to requests for additional information such as financial reports for all the entities in the group or accountants letters confirming things like the liabilities in non-trading, trustee companies. 

4. Loan purpose

Home Loan lenders do not provide funding for working capital for business use, funding for business expansion or finance to meet tax liabilities.  They look very carefully at the loan purpose and in particular, any request for ‘cash out’ the application.

So if you’re self-employed and contemplating a home or investment loan, prepare for a little extra paperwork and a more rigorous assessment process.  A little preparation and understanding of what to expect will eliminate much of the stress but to achieve the best outcome involve your accountant and seek out the help of Etairos Finance, as part of Etairos Accounting we have plenty of experience dealing with self- employed applicants. 

Call Paul Cunningham on 0466 886 252 



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