Getting a mortgage while being self employed in some cases is more difficult but there are definite methods of receiving a home loan when it is required. It can be, however, quite different to when a person is employed by another company.
The Process of Getting a Mortgage while Self Employed
When a person is running their own home business, but they need a mortgage, the process is very different compared to a regularly employed person. The way that a person assesses their income can be complex. Many times as a result of this difficult process, individuals who are self employed have a hard time receiving the mortgage that they need using their tax returns.
Facts Borrowers Need to Know
There are certain details that the banks don’t generally tell people and one of those things is that lenders have different ways of assessing potential borrowers. The financial statements and tax returns are interpreted in different ways by these lenders and the credit departments have their own calculations to assess a person’s income.
Also, something that many people don’t realize is that the staff members of the bank aren’t usually knowledgeable about the ways that the finances of the self employed work. They may not be able to read and interpret the financial statements of the self employed accurately. They often try to have someone from the business banking department take care of these things so they don’t have to handle its complexities.
One of the methods to get approved is to apply with the right lender. Certain mortgage brokers are self employed themselves so they know how it works. They have a background of working with lenders in which they have had to make the decision of whether or not to approve a client for the application. This means that the broker can find the right lender for each individual and assess the client’s income in the most appropriate and accurate way.
While each lender has its own way of calculating income, there are generally three main methods of doing so.
- The main method used by lenders is to average out the income brought in by the client in the previous two years. They also may look at the change in the income in that two year span as well. If the income has increased by more than 20% then they may add that percentage increase to the previous year’s income to calculate the average. This method may not be the most accurate under certain circumstances.
- The method of using the most recent year’s income is perhaps the most accurate but very few lenders use it.
- Using the lowest income from the last two years is often used when lenders see that the most recent year’s income is less than the other previous years. They make the assumption that this trend in lowered income will continue.
These are just three ways and there are other factors that lenders use to assess the level of income.
The actual income isn’t the same as the taxable income that a person uses to pay their bills. Lenders usually add back any expenses that a person may have had to take care of that may have reduced the taxable income. These are not real expenses or expenses that are an ongoing commitment. Some examples include one off expenses, interest expenses, the company car, rental property expenses and trust distributions.
Mistakes that Banks Often Make
Because of these complications in tax forms, add backs and other such things, banks can often make mistakes when assessing the income of the self employed. There are some mistakes that are made more than others. Many don’t understand how to calculate or assess the income of the self employed; some take certain parts of the income or expenses into account twice; many lenders procrastinate in reviewing the applications.
The secret to getting approved for a home loan is often going to the right lender. The mortgage broker knows the details of each lender and after carefully assessing the client’s financial details, they can also find the right loan from the most suitable lender.
This article was written by William from homeloanfinder.com.au. Visit HomeLoanFinder for a range of articles and guides on home loan interest rates and variable home loans today.