An Insiders Guide To Self Employed Income Proof

Self employed income proof for home loans can be complex.  Even if you’re applying for a low doc loan, determining the best next step to take isn’t simple.

It’s not rocket science, but there is a particular type of science involved…

This article explores what factors lenders consider when determining your income if you’re self-employed, and also offers a behind-the-scenes understanding of the different types of loans that are available for self employed borrowers.

Effectively, it’s all about self employed income proof, and the options that are available to you.

How to use the advice in this article?

First, get yourself a coffee – it does get a bit heavy, because we’re rolling dozens of lender policies in to the one article.

Second, take note of the website chat – ask us for clarification, there’s no stupid questions!

Then…

  • Scan the headlines to find something that is relevant to you, and read the section meaningfully.
  • Use our instant chat if you have a question you’d like answered immediately (we’re often available on weird days at weird times, so reach out any time and wait for the response)…

Remember, we’re trying to help you here – so leave a comment if you have some constructive feedback, we’d love to hear from you.

Here goes…

When it comes to self employed income proof, you have 2 options:

  • Provide all your Tax Returns and Financial Statements, so you can choose from all lenders in the marketplace.  In this case, you’d be eligible for a Full Doc loan
  • Or you could be looking for a short-cut.  We call them Low Doc loans, and this article will help you understand most of the variations in product, pricing and lender policy.

When self employed, then your income can be assessed in one of two ways…  1) As a full doc loan. or 2) As a low doc loan.

Note: If you are a Director of any company, it will show up on your credit report and your lender will investigate and request to verify the income from that source.  If you have a company that’s not trading and your Accountant can confirm in writing then this can normally be waived.

What Is A “Full Doc” Loan? (Traditional Self Employed Income Proof)

This is without doubt the best form of self employed income proof when you’re applying for a loan.  It’s not the simplest, but it will give you access to the most options and the best deals.

Basically, a full doc loan requires a fully verified income assessment, where you provide all the documents the lender wants to assess your income in detail.

If your lender is following a prudent procedure for verifying your income, it’s actually more likely they are providing you with a loan you can afford to pay back, whilst also avoiding fraud and possible loss to the lender (they have a lot of data to help them create their lending policies).

Due to the benefits of a full doc loan, this is the type of self employed loan that most people prefer.

You will have to provide all of the following documents for either 1 or 2 financial years (only 10-20% of lenders are happy with just the 1 year’s income documents so you can ask us which lender suits you, if you just want to provide 1 years):

  • Company/Business Financial Statements
  • Company/Business Tax Returns
  • Individual Tax Returns; and
  • Individual Notice of Assessment (received from the Tax Office after you submit your Tax Return)

Watch the 2 minute demo if you need more explanation of these four documents:

An exception to the above, for example, is if you trade as a Sole Trader and therefore you may not have Financial Statements or a Business Tax Return.  If that’s the case, you obviously you don’t need to get them, but you will have to provide the other two documents (Individual Tax Return and Notice of Assessment).

Tip:  You’ll need both the Financial Statements and Tax Returns for your business (despite the fact that they have a lot of duplicated information).   Generally, every lender requires both and just one of them will not pass for Full Doc loans.

Benefits of a Full Doc loan (the best option for self employed income proof)

There’s good reason to choose a full doc loan, and it all stems from one very obvious fact…

  • Low Risk…for the lender.

For a ‘full doc loan’ your self employed income proof is verified to a deeper level, providing more comfort for your lender.

Greater income verification means less borrower defaults, and less risk.

So by choosing to get a full doc loan, you get these benefits:

  • Better Interest Rates (choose the product you want, without paying for a loaded interest rate)
  • Lower Fees (especially if you’re borrowing more than 60% of the property value)
  • More Options (many lenders don’t offer low doc loans, will only let you choose from one product, and/or significantly restrict their lending policy.  With a Full Doc, you normally get to choose from the entire product suite)
  • Greater Flexibility (if your needs change, it can be easier to make that change)

Want to avoid providing financials for one of your companies?

If you have a company or trust that you don’t want to provide income documents for, and you do not need any income from that entity to support your loan application, and that entity is either:

  • not trading
  • is trading at a profit, and/or has no losses

Get written confirmation from your Accountant, and your lender may waive the requirement requirement to provide financials and tax returns for that entity.

Reminder, that’s nil-nada-zilch income (that’s a big fat $0) that can be used in your loan application from that particular entity.

Of course, if you want to go the low doc route you can still do that but you’ll miss out on the above full doc loan benefits.

How your income is calculated in a Self Employed loan

When it comes to self employed income proof, lenders can create their own policies.

Therefore the income amount used in your home loan application is often different from bank-to-bank.  This can significantly impact you maximum borrowing power, and can often mean the difference between getting the a home loan approval or refusal.

Self Employed Income Proof over 1 year or 2 years?

Every lender is different, and we could copy and paste 20 different credit policies and they’d all be slightly different wording.

Providing just the 1 year of self employed income proof will rule out 80-90% of lenders.  It doesn’t mean you’ll get a worse loan by providing just 1 years figures (you might still get your first choice), but it does mean that there’s going to be less options for you.

Here’s 3 categories that catch probably 95% of the lender policies.

  • 2 Year Average
    • When the difference between those two years is more than 20%, the average won’t be used:
      • Some will use the lower of the 2 years, when there’s greater than 20% differential between the two years.
      • Others will use a maximum of 120% of the lowest year (provided the most recent year was the higher of the two).
  • Most Recent Year (must still provide 2 years figures)
    • Whilst still requiring 2 years, many will conduct the assessment on your most recent figures.
    • However, if the latest year has increased by more than 20%, you will probably find that the maximum amount will be 120% of the prior year.
    • If the most recent year is lower, that’s probably what your lender will use.
  • 1 Year of Income Proof
    • A number of lenders are happy with just the one years self employed income proof, and will use that year for their assessment.
    • Financial Statements will normally show the year prior as a comparison, your lender will be taking a look at it and this may raise some questions.

Watch how bank policy on Tax Returns can boost the borrowing power (by double, or more)…

How fast do you have to get the latest Tax Returns prepared?

As usual, almost every bank is different when it comes to what they think is a reasonable amount of time to get your latest tax returns prepared.

  • Some lenders (such as ANZ Bank) require the most recent financial year after 31 October – just 4 months after the end of the financial year.
  • Others don’t require the latest figures until after 31 May (11 months after the end of the financial year)
  • Obviously if you’ve had a difference with the latest years figures it can impact your borrowing capacity, therefore a lenders policy of requiring those latest figures (or not) could mean the difference between getting a loan or missing out.

Even when lenders use the same policy from above, there’s still different methods for how they read the financial statements and what figures they will actually use in their calculations.

The biggest differential comes from self employed income add-backs:

Also called allowable add-backs, they exist because a self employed business has various expenses which are sometimes non-cash expenses, sometimes they have one-off expenses, or they could have expenses that are accounted for in some other way during a lenders assessment.  Some examples of allowable add-backs are:

  • Depreciation (an example of a paper write-down of income, and the business has normally had that cash flow available to them during the financial year)
  • Directors wages (if that Director is also an applicant, ensuring not to double-dip on income if it’s also shown in Individual Tax Returns)
  • Interest (on loans where there is a repayment included within the serviceability calculation, because that interest is already included in the repayment)
  • Rent (if your business is buying premises and you’re applying for a loan, and the rent will cease post-settlement)
  • One-off expenses (subject to lender interpretation)
  • Non-recurring expenses (previous expenses that are no longer applicable)

2 Hacks To Get A Paperwork Short-Cut 

Of course there’s short-cuts.  They won’t suit everyone, but if you’re looking for a way to avoid providing all your financials but still get a full doc loan, this will help:

Hack 1: Provide NO Financials, and Get a Full Doc Loan

  • Provide only your 2 most recent Individual ATO Notice of Assessments.

And…  That. Is. All.

This can only be done by 1 bank…  Hint: It’s a good one!

Hack 2:  NO Financials or ATO Assessments, and Still Get a Full Doc Loan!

Provide nothing from the accountant or the ATO.

  • Pick any 12 month period, provided the end date is less than 6 months ago.
  • Get 12 months Profit & Loss from your accounting software (eg. MYOB, Xero), and your BAS Portals (to verify you’ve been declaring your income and paying your BAS).
  • Borrow up to 70% of property value
  • Get cash out for any purpose including ATO Debt

There’s also only 1 bank that does this.

What’s the Minimum Number of Years My Business Should Be Operational?

2 Years.  Generally.

Most lenders have the policy of 2 years in business, including those that require just the 1 year of financial statements for income verification.

If you have less than 20% deposit, you may find options are limited if you don’t have 2 full years in business.  However, if everything else in your application stacks up strongly, you should be able to find a pretty good lender.

Funnily enough, even with just a 1 Day ABN, there’s Low Doc loan options.

Yes, you read that correctly.  Registered your ABN yesterday?

There’s still hope…

Low Doc Loans (Simplified Self Employed Income Proof)

The low doc loan requires very little income verification.  They’re a short-cut, when it comes to gathering and verifying your income.

Often you are self-declaring income, and the verification of that declaration is simplified.

Benefits of a Low Doc loan

This is generally the easiest method of self employed income proof.

You could choose a low doc loan if…

  • You have no tax returns and still want to borrow money you can still borrow money.
  • Want your loan fast and easily, without the hassle of gathering your documents.
  • You want a choice! (to choose not to provide your income documents).

The required documents for this type of loan vary a lot from one lender to the next.  Typically, you’ll be required to provide a minimum of:

  • Bank account statements, and
  • BAS statements
  • And some lenders will give you the option to provide an Accountants letter, in lieu of one of the above.

If you’re new in business, you may be eligible for a 1 day ABN policy (below) and previous PAYG income will need to be verified.

Some Big Differences in Low Doc Lenders

In low doc loans the variation in pricing can be significant.

You’ll probably be eligible for either a conforming or a non-conforming low doc loan product.

Conforming loans will give you best rates and will be cheaper, and will generally be available through a major lender.

Non-conforming loans are generally for situations where the major lenders refuse to deal.

Low doc loans are available even to people who have been self-employed for one day, though GST registration may be necessary.

Minimum period for operating your business also varies.  Depending on where you fit in the timeline, your available lenders may change:

  • 1 day, 3 months, 6 months, 12 months, 2 years
  • GST registration from 1 day to 2 years may also be required

As your business moves through the above timelines, you’ll have more options open up for you.  The shorter the time period, generally you’ll find you’re more likely to fit in to a higher cost non-conforming category.

The Best Low Doc loans

If you want the best low doc loan (the most product options, and the lowest rates and fees), you’ll want to get a conforming low doc loan (explained above).

You’ll need to fit in to the following:

  • Minimum of 2 years ABN and GST registration
  • Borrow up to 60% of property value, no Lenders Mortgage Insurance premiums
    • Hint: Stay within 60% for the best of the conforming low doc loans
    • You will probably get to choose the exact same products that full doc borrowers get to choose
  • If you borrow between 60-80%, your loan will be subject to Lenders Mortgage Insurance premiums and policies
    • Your product options will be further restricted
    • Lenders Mortgage Insurance premiums will normally range from 0.5-1% of the loan amount
    • You may be subject to a higher interest rate
  • Clear credit history
  • If you’re looking to borrow more than 80% of the property value, you’re definitely in the non-conforming range.

Other Low Doc Loan Policy Variations

  • With 1 year ABN
    • You can borrow up to 60% of property value
    • You could also get standard loan products
    • And pay no Lenders Mortgage Insurance fee.
  • With 1 year ABN and 1 day GST Registration
    • Borrow up to 85% of property value (for purchases)
    • Refinance up to 80% of property value
    • Bad credit?  Get up to 75% for credit impaired
  • 1 Day ABN Registration
    • Yes! With just 1 day of ABN registration you can get a low doc loan
    • Your income will be verified against your previous PAYG employment
    • It must be a realistic transition, such as a carpenter going from wages to ABN as a sub-contractor.  An example of something that is not a realistic transition would be a Chef opening up a restaurant in the last few months.  In the latter example, you probably need a business profit forecast and some business lending, not a low doc home loan.

Our Advice

If you can get your Financial Statements and Tax Returns in order, get them.  Go for a full doc loan if you can.

But if you can’t, aim for a loan at less than 80% of the property value.

Especially when it comes to low doc, do not try and inflate your figures so that you can get a loan that you normally might not be eligible for.  This strategy has tears written all over it – plus it’s fraudulent to lie on your application.

We’re the wrong brokers for you if you’re going to lie on your application because we do our homework, we’re very very thorough, and we only deal with honest people.

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