Navigating the maze of home lending as a self-employed individual can seem daunting. Unlike traditional salaried employees, those who own their own business or work as contractors face unique challenges when it comes to securing a mortgage. Greg from My Mortgage delves into this complex topic, offering valuable insights and advice for self-employed individuals looking to buy a home.
Understanding Your Income
The most critical aspect that banks consider is proof of income. For self-employed individuals, this typically involves providing detailed business financials. Banks primarily focus on net profit and the salary paid to shareholders. Greg emphasizes the importance of showing legitimate income, which means income that you have paid tax on. This requires a delicate balance between being tax efficient and demonstrating sufficient income to qualify for a loan.
The Importance of Consistency
Lenders like to see consistency in your income. This can be a challenge for those whose earnings may fluctuate significantly from year to year. Generally, banks look for at least 18 months of consistent income, though this can vary. Some banks may average out your income over several years, while others might focus on the most recent year or the lowest earning years. It’s crucial to have detailed discussions with your accountant to ensure your financials are prepared in a way that is most likely to support your home loan application.
Choosing the Right Bank
It’s a common misconception that your current business bank will also be the best source for your home loan. However, this isn’t always the case. As banks adjust their policies, including the thresholds for assigning personal business managers (now often set above $1 million in turnover), it's vital to shop around. Greg points out that while banks handle commercial lending directly, having an advisor who can act as your personal banker, offering access to multiple lending options, can be incredibly beneficial.
Early Conversations with Your Accountant
Greg stresses the importance of early and thorough conversations with your accountant. Structuring your finances appropriately from the start can make a significant difference in your ability to secure the necessary lending. Your accountant can help navigate the complexities of tax efficiency versus loan eligibility.
For self-employed individuals, securing a home loan is not just about proving you have the income; it's about proving it consistently and strategically. The journey requires careful planning and expert advice. Whether you're a contractor or a business owner, understanding these nuances and preparing accordingly will increase your chances of securing a home loan. For further guidance or specific questions, reach out to experts from My Mortgage.