Central Coast resident, Simone asks
“To obtain a home loan, what documentation do self-employed individuals who work under a company structure require?“
Thanks for the question Simone.
For this one there’s a fair bit to consider. Home loan documentation for those that are self-employed or those who apply under a business would really depend on the lenders’ criteria, type of loan and the loan purpose best suited to your unique financial position.
On a standard home loan, most lenders require two years of company tax returns, two years of company financial statements, and for the actual loan applicants, who are typically the directors/shareholders of the company, lenders would require the last two years of tax office assessment notices.
There are some exceptions to this rule where lenders in certain situations, only require the most recent years’ tax returns. In this instance, one year’s company tax return, one-year company financials, one year’s personal tax return and possibly one year’s HEO Australian Tax Office Assessment Notices will be acceptable.
If your tax returns are not up to date, alternative document loans or what was previously known as low-doc home loans is a suitable option. The documentation required for this type of loan would include some form of alternative evidence of income as opposed to tax returns such as the last four business activity statements. The lender will look at the turnover vs expenses and extrapolate reasonable affordability based on the business activity statements.
Some lenders accept the last six months bank statements, business bank statements and decide if the borrower’s declaration of income reasonably matches the activity of income on the bank statements There’s a possibility that some lenders may accept a signed letter or a prescribed form. Every lender has a different form, but a form that can be completed and signed by the client’s accountant or the borrower’s accountant confirming that the income that they’ve declared is in line with what the accountant knows of their financials. These days the use of prescribed forms happens on rare occasions and seldom accepted in isolation.
The way lenders calculate your income will determine the supporting documentation they require to validate the information.
For example, if a borrower has only become self-employed in the last two or three years, generally, the first year’s figures may not be profitable. Typically, the second or third year of business may improve substantially, and, in this instance, it would be beneficial to use a lender that considers the most recent years’ figures instead of looking at the last two years.
Many people trade under a company structure as opposed to a sole-trader structure, particularly those with employees where income is earned by the company, employees are paid by the company and owners then pay themselves a wage or the owner may be getting dividends from the company. For example, the company would be the owner of the business, and the borrower would be typically the director and shareholder such as a person running a Subway store as a franchise.
What a lender may look at is the personal wage or the personal income as shown on the applicant’s tax return and some lenders may also consider the profit of the company. If the company the applicant trades under has made a profit and they paid themselves a wage, then the lender may consider both of those figures when working out serviceability.
How does this differ to documents required for a sole trader, someone trading as an individual?
In terms of documentation requirements for sole traders, the process remains much the same except the bank doesn’t need the company returns or the company financials for a sole trader. Most lenders would still need two years tax returns, but they’d only be personal tax returns. The actual tax return itself usually has all the information that the lender needs to make a decision on the application.
The way lenders calculate income for the self-employed can be different between lenders some lenders will consider company profit as well as the personal taxable income of the loan applicant. Some lenders will consider depreciation expense, which is a non-cash expense, then there are some lenders that may add that back to the income which can help your borrowing capacity. Finding the right lender and suitable product to match your individual circumstances will aid in a successful loan approval outcome.
Give us a call
If you’d like more information then give us a call. We’ve helped thousands of self employed individuals as well as those working under a company structure acquire finance to buy their own homes.
For more than 17 years Mortgage World Australia has helped hundreds of Australians realise their dream of owning their own home. Through our affiliation with the largest network of individual mortgage brokers in Australia we can help you find the right loan to suit your needs. Whether you are a first home buyer just starting out on your real estate journey, an experienced investor or you are just looking to get a better deal on your current home loan then give us a 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.