Home Loans For the Self Employed

The mortgage crisis of the past few years has caused banks to tighten restrictions on lending practices. The preference these days for low risk loans has made mortgages for the self employed more difficult to obtain than in previous years. The two traditional loans for the self employed, the stated income and low-documentation low doc loans, have undergone major changes in the industry. The stated income loan, in which borrowers state their income and lenders verify the amount through official tax returns, has been discontinued by federal programs and most private banks. However, the Low doc loan is still available for the self employed in both clean credit and bad credit options.

Generally, lenders determine loan applicants’ incomes using pay stubs and income summaries. When working on mortgages for the self employed, official income records such as payslips aren’t aceptable. Lenders may rely on previous years’ tax returns, but the self employed tend to take big reductions to lower their net income on which they pay taxes, so their tax returns don’t report accurate income. The low doc loan was created for this circumstance, in which income cannot be verified through traditional means. Instead, the borrower provides a certified income from a public accountant. Additionally BAS Statements or Business Bank statements can be used to verify the income of the borrower.

The low doc loan is a good option for those who have been self employed for more than 12 months, and can demonstrate, through good record keeping, successful business and sufficient income. However, unverified income statements run the risk of embellishment, so the bank generally asks for additional assurances on low-doc mortgages for the self employed.  The low-doc loan also requires that the self employed borrower put a 20% down payment on the house, and keep an emergency reserve of 6-12 months’ mortgage payments in case of a long period without work.

In past years, the low-doc loan didn’t have such strict requirements, and were offered by most banks. As of 2010, the federal government imposed more stringent rules on low-doc loans because these types of loans had a high rate of default during the GFC crisis. Due to the recent performance of low-doc loans, home loans for the self employed can be more difficult to obtain, but certainly not impossible. Individuals who meet the criteria listed above can qualify for the no-doc loan.

If you are a self employed small business owner, now is the time to start thinking seriously about your personal finances…