Perth resident, George asks
“I’m self-employed but my tax returns aren’t up-to-date. Can I still obtain a home loan?“
Thanks for the question George. Of course, sorting your tax out before borrowing might be your best bet, there are still some options available to you.
If you do not have up to date tax returns some lenders will consider alternative forms of income as a declaration or evidence of earnings.
For a standard self-employed home loan, banks would typically require one to two years tax returns and full financial statements, however, there is an alternative option which is known as an ALT Doc or low-doc loan which is what it was previously termed as. With this type of loan, some lenders would require one of the three or combination of the three documents consisting of –
- Activity statements, so between six and twelve months business activity statements, the last two quarterly statements or the last four quarterly statements depending on the lender.
- Some lenders will accept the last six-months business bank statements and
- the third option that a handful of lenders offer is a declaration signed by the borrower’s accountant confirming the income declared is in line with your financials.
A lender will request and evaluate the last four business activity statements, while some lenders will ask for two, it’s more common to provide the last four statements to summarise the turnover. Some lenders will also look at the non-capital expenses to make sure that the income declared by the applicant is fair and reasonable and in line with what’s reflected on their business activity statements.
The same thing applies to the business bank statements, so typically a lender will look at the last six-months credit detail and analyse the figures to ensure it is in line with what the applicant has declared. So, in summery the last six months of both the business activity statements and business bank statements are analysed, specifically the credits to the account, some lenders may look at debits as well, but typically they’ll add up all the credits and just make sure that it matches the declared income.
This type of loan is fairly common and there are many brokers who specialise in this type of lending, particularly as there are many self-employed people out there that don’t necessarily meet the typical lending criteria.
What information will my accountant need to provide?
The written letter or declaration from the account is not a generic letter that your accountant drafts, typically lenders will not allow a self-drafted accountant’s declaration, but rather that the accountant completes a lender form which is specific to the lenders criteria, with unique wording and different requirements that accountants are requested to sign. This is a structured document and information required will vary from lender to lender, some may request the turnover figures some will even request the gross taxable income.
Is there any difference between alt-doc and low-doc loans?
There is no difference both loans are structured in the same way and just termed differently. These days, due to the responsible lending requirements, lenders need to obtain evidence such as the business activity statements or the bank statements to confirm that the income being declared is fair and reasonable. In the past, Low-docs were a bit different, where borrowers would just declare an income, and as long as their assets were in line with the income declared then lenders would just accept it, but these days lenders are required to obtain some supporting evidence of the declared income.
Right after the Global Financial crisis and the subprime crisis in America, lending tightened up. The NCCP Act and The National Consumer Credit Protection Act imposed further rules and regulations around lending, which resulted in lenders requiring additional substantiating evidence of income rather than just a simple declaration.
One of the biggest challenges of obtaining a home loan when tax returns are not up to date is that you generally need a substantial deposit. So, if you’re buying a property, you need a bigger deposit anywhere between 15-20% or if your refinancing, so you may end up with around 85% of the property value.
What types of lenders support this type of financing or is this considered specialist lending?
While not as common as they used to be there are some well-known banks that will still offer alt-doc type loans, typically most of the lenders that offer this type of loan are the smaller non-bank lenders or specialist lenders. This type of loan structure does attract higher interest rates and potentially additional fees. Rates and fees are dictated by the loan devaluation ratio, so the higher percentage of the property value that you borrow, typically the higher the rate is, and the higher the fees can be. It stands to reason the higher the risk the higher the rate and fees.
What sort of success rates are there with people in this position that apply for finance?
There is no need to worry if your tax returns are not up to date as long as the income evidence you provide supports the declared income, then typically applicants are successful. The success rate is historically quite high, where one can fail, is where a discrepancy occurs when an applicant declares an income that isn’t in line with what the documentation reflects.
Mainstream lenders do not look favourably upon outstanding debts or if applicants owe the tax department a large sum of money. There are some specialist lenders out that will overlook this, but typically they require you to pay a debt out with the loan. Low-doc loans are widely used by people that owe money to the tax office and they will apply for a refinance or borrow against the equity in their property to then borrow that money to pay out the tax office.
We are often asked how someone that is buying a property, that doesn’t own an existing property or have the facility to settle a debt from home equity, if there are other options? Can they still take out additional funds to cover that outstanding debt with the ATO and the answer would be yes, in this situation you would be required to have a sufficient deposit, so typically they would just hold that money, instead of putting it all down as a deposit they’d have to probably use some of that deposit to pay down the ATO debt. This is not an ideal situation, and lenders do not like it if you have outstanding debts to the tax office.
So, in summary, a few key points to remember when applying for a home loan when your tax returns may not be up to date are –
- You have the option of a Low-Doc or ALT Doc loan
- Prepare your last six months business activity statements, last six-months business bank statements and potentially a signed declaration from your accountants stating your declared income is true and correct
- Typically, you will need a larger deposit anywhere between 15-20%
- Applicants are generally very successful provided the income evidence you provide supports the declared income.
- Settle any outstanding debts you may have incurred, this represents loan complexities and lenders do not favour applicants who have outstanding ATO debts.
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Call us today if you have any questions, we can help guide you through this home loan application process– our team would welcome your call!
Patrick is a Director and a Home Loan Specialist. He has been helping Australians with home loans since 2001. Prior to working as a mortgage broker Patrick was employed by Macquarie Bank for 3 years and also worked as an accountant for a publicly listed company. Patrick holds a Bachelor of Business majoring in Accounting and sub-majoring in Finance and Marketing from University of Technology, Sydney.