You Can't Get a Mortgage If you are self-employed

If you are self-employed, you might think that getting a mortgage is out of your reach. But that's not necessarily true. While there may be some additional requirements and considerations for people who are self-employed, it is still certainly possible to secure a mortgage ?? in New Zealand.

In this blog post, we will explain some of the challenges and solutions for self-employed mortgage seekers, and offer some tips on how to prepare your application and increase your chances of approval.

What are the challenges for self-employed mortgage seekers?

One of the main challenges for self-employed mortgage seekers is proving their income. Unlike salaried employees, who can easily show their payslips and bank statements, self-employed people have to provide more complex and detailed financial records, such as:

- Balance sheet: This shows your business's financial position at a given point in time, such as the end of the tax year.

- Profit and loss statement: This shows your business's financial performance over a specific period of time, such as a month or a year.

- Cash flow statement: This shows your business's cash inflows and outflows over a specific period of time, and reveals any seasonal patterns or cash flow problems.

These statements have to be prepared by a qualified accountant and cover at least two full years of trading history. Some lenders may also ask for interim financials or GST returns to verify your current income level.

Another challenge for self-employed mortgage seekers is meeting the serviceability criteria. This means showing that you can afford the repayments on the loan, based on your income and expenses. Lenders will look at various factors, such as:

- Your net profit before tax: This is your income after deducting all business expenses, but before paying income tax.

- Your add-backs: These are expenses that you can add back to your net profit to increase your income, such as depreciation, interest on business loans, personal drawings, or one-off costs.

- Your debt servicing ratio: This is the percentage of your income that goes towards servicing your existing debts, such as credit cards, car loans, or overdrafts.

- Your living expenses: These are your personal expenses that are not related to your business, such as food, utilities, transport, entertainment, etc.

Lenders will use different methods and formulas to calculate your serviceability, depending on their policies and risk appetite. Some may use an average of your last two years' net profit, while others may use the lower of the two. Some may allow more add-backs than others, or apply a higher or lower debt servicing ratio threshold.

How can you overcome these challenges?

The good news is that there are ways to overcome these challenges and improve your chances of getting a mortgage as a self-employed person. Here are some tips:

- Keep your financial records up to date and accurate. Make sure you have all the required statements ready to go when you apply for a loan, and that they reflect your true income and expenses. Avoid any discrepancies or errors that could raise red flags for lenders.

- Maintain a good credit history. Lenders will check your credit score and report to assess your creditworthiness and reliability. Make sure you pay all your bills on time and avoid any defaults or judgments. If you have any negative marks on your credit report, try to resolve them before applying for a loan.

- Save up a decent deposit. The more money you can put towards your home purchase, the less you will need to borrow and the lower the risk for lenders. Having a deposit of at least 20% of the property value will also help you avoid paying lenders mortgage insurance (LMI), which is an extra cost that protects the lender in case you default on the loan.

- Consider using a mortgage broker. A mortgage broker is a professional who can help you find and compare different loan options from various lenders. They can also advise you on how to prepare your application and negotiate on your behalf with lenders. A mortgage broker can save you time and money, and increase your chances of approval.

What are some alternative options for self-employed mortgage seekers?

If you are still struggling to get a mortgage from mainstream lenders, you may want to consider some alternative options, such as:

- Non-bank lenders: They tend to have more flexible lending criteria and cater to niche markets, such as self-employed borrowers. However, they may charge higher interest rates and fees than bank lenders.

- Low-doc loans: These are loans that require less documentation than standard loans. They are designed for self-employed borrowers who have difficulty proving their income. However, they may have higher interest rates and fees, lower loan-to-value ratios (LVRs), and stricter serviceability requirements than standard loans.

- Guarantor loans: These are loans that are backed by a third party, such as a family member or friend, who agrees to repay the loan if you default. They can help you get a loan with a lower deposit, lower interest rate, or lower serviceability requirement. However, they also pose a risk for the guarantor, who could lose their own property or money if you fail to repay the loan.

Being self-employed does not automatically disqualify you from obtaining a mortgage. While there may be some additional requirements and considerations for people who are self-employed, it is still certainly possible to secure a mortgage ?? in New Zealand.

By following the tips above and exploring the different options available, you can find a mortgage solution that suits your needs and goals. And remember, you don't have to do it alone. A mortgage broker can help you navigate the process and find the best deal for you.