Finding the Right Mortgage can be Tricky at Times
Owning a business and being responsible for your income and taxes is the holy grail of independence. There is no greater feeling than working hard and putting yourself in a position to earn substantially more than you would have if you were employed. The hassles of running a business are undeniably tough at times, but the gains are more often than not, worth every trouble.
When all these is said and done, there is a need to have a full understanding of the difficulty level involved in getting a mortgage among the self-employed. Unlike the employed, being self-employed presents a unique set of circumstances in as far getting a mortgage is concerned. Although there are numerous mortgage products available in the market, it can be daunting to find a product that suits the self-employed.
Herein we will explore the various challenges that make it difficult for the self-employed to get mortgages.
#1. The Difficulty Of Verifying Taxable Income
One of the major problems of being self-employed is being able to prove your income. For mortgage loans or any loan for that matter, if you cannot make the payments, you do not get the loan. Herein lies the challenge that many self-employed individuals face; proving that they have a steady income flow to meet their monthly obligations.
It is important to note that many of the self-employed businesses do not necessarily have a steady monthly income, but rather rely on the seasonal fluctuation to make the majority of their income. In this regard, if a business owner tends to earn the majority, say 85% of the annual income, of income during winter it would be difficult to prove that they have a reliable stream of income when they search for a mortgage during summer.
#2. The Risk of Having Too Many Deductibles
For the self-employed, a crucial element of succeeding is keeping cash flows high whilst negating the liabilities to the minimum, including tax liabilities. It is, therefore, common for the self-employed to engage accountants to deduct as much as possible to reduce the amount of money they pay taxes. In doing this, self-employed individuals tend to reduce their net income and inadvertently, reduce their ability to qualify for higher mortgage loans.
In this regard, maintaining a balance between tax liabilities and positioning yourself for higher mortgage loans should ideally be part of doing business for the self-employed.
#3. Your Borrowing Capacity/ Your Credit Scores
The final element that makes it very difficult for the self-employed to get mortgages is their credit scores. More often than not, running a business involves taking loans to ensure that your business is a success. This may involve exhausting all the credit avenues available, thereby stretching their credit lines.
Inadvertently, in taking every loan available to ensure success in business, the self-employed usually hurt their credit scores. Borrowing so much causes one’s credit score to drop, thus making it very difficult for the individual to get high-quality mortgage loans.
As it is with many of the loan products, there are plenty of mortgage products for the self-employed. However, understanding what affect you getting the loans has, makes it easier to plan for it as a self-employed.Read More
Paper Work and More Paper Work – It Never Stops!
Most of the economy of the Australian continent is driven by either self-employed professionals or small businesses. However, anyone that works for themselves and is looking to buy a home faces obstacles distinct to being self-employed. The paperwork and documentation requirements alone are often mind-boggling, simply because someone working alone doesn’t have the ability to demonstrate proof of steady income like someone with a full-time job does. An employee working for a boss gets a paycheck, and the attached stub is usually enough to prove income. If you work for yourself, you can’t do this.
Lenders have to protect themselves and their investors against all forms of fraud, and unfortunately, some individuals claiming to be self-employed either are not in fact, or are just overstating how much money they make. That’s the reason why lenders require a mountain of documentation or an unusually large down payment; they aren’t looking to torture anyone, but they have to watch out.
Another potential issue in situations like this is that many self-employed professionals actually minimize their taxable income deliberately, with help from their accountants. They do this to benefit from all possible tax breaks and deductions, but it makes their stated taxable income lower levels than lenders might like. In the worst cases, self-employed professionals have business and personal deductions that get mixed up. Also, professionals without a long history of self-employment may not have the length or history of financial statements lenders like to see.
What Choices Do Self-Employed Professionals Have?
Banks and lenders are increasingly willing to partner up with self-employed professionals, and many institutions are now aware of the fact that individuals working for themselves often earn more than the average per capita citizen. Luckily for the self-employed, most lenders and brokers offer programs that simplify things for them. Low doc loans are particularly offered to make things easier for borrowers who work alone.
If you are self-employed and you want to apply for a low documentation loan, then you have to finish a total declaration of your full financial situation. The form itself is simple, and it lets you provide information regarding your income without substantiating documentation. You’ll also need a higher than usual down payment and good personal credit. Since the down payments tend to be larger, you usually will not need lenders mortgage insurance.
Do You Have A Deposit?
If you are familiar with the mortgage products on the Australian market, then you know that 10-percent down is standard. However, low doc loans are not standard, even if widely available, so the borrower is going to have to go in with a more potent equity stake. You can expect to be asked for at least a 20-percent down payment, if not more. On the other hand, if you personally qualify for a First Home Owner Grant, your lender might let you apply this grant towards saving up your down payment.
Among the first ever banks to offer low-doc loans was National Australia Bank, helping out self-employed professionals with packages that didn’t punish people working for themselves with unnecessary interest and fees. NAB’s low-doc loans are offered in similar packages to standard financing options, and fixed and variable rate packages are both available.
Sub-prime lenders, like Liberty Financial, are among other low-doc loan providers. Liberty has a Nova program created with self-employed professionals in mind; there is even a Jumbo option for entrepreneurs of high net worth, with loans in the neighbourhood of $10 million available.
Are There Easy Ways?
Self-employed individuals discover that attaining a car loan is not an easy thing, and it’s no different if they plan on using a car for themselves or their business. However, the proper choices and a little bit of homework can yield a handful of potential possibilities. Innovative and new banks, finance companies, lending institutions, and brokers are around and willing to finance cars for self-employed professionals.
The opening up of the loan markets is the driving force behind this, as more banks and businesses than ever before are now allowed to lend people money. That makes demand for lenders weaker, so the ones still on the playing field must compete harder for business, and that’s a win for borrowers, who get better terms and conditions.
Self-employed professionals win even more in this arrangement. If you work for yourself and need a vehicle, either for personal or business use, then getting a loan is just a matter of doing your research into the possibilities and then choosing the loan that is right for you.
What Options Are Available?
Car loans generally come in two forms. The first are unsecured loans that you can be approved for without providing any kind of security or collateral for the loan. You just need proof of business ownership and sufficient monthly income to cover your basic bills and ability to repay the loan. Bank account statements typically serve well for this as proof to lenders.
The other kind of loan form is a secured loan. For a loan like this, you do have to provide some kind of security to base the loan off of, such as a fixed asset such as your home. So, you need to think hard about whether you want to take this risk, because if you fail to pay back the loan, the bank can seize your home or other secured assets to take back what was lent. The other point of consideration is the interest rate.
Interest rates tend to be lower for a secured loan, even though these loans are more likely for someone with bad credit or who has a hard time proving income. Unsecured loans do offer the benefit of not risking your home, but that is counterbalanced by the higher payments required each month.
What Happens During The Application Process?
Once you decide which loan type is right for you, you must get your proof of income and other needed documentation together. Banks want to see that even self-employed individuals have steady or regular monthly income, and that there is a long-standing history of it. With good credit and steady income, even a self-employed professional can get a car loan.
You might even find loans like this online, which is a great time-saver for someone working online from home. This saves you running around town visiting brokers and lenders, and response times online are usually pretty prompt. Look around some, and you’ll find brokers who have a particular interest in lending to self-employed professionals.
Foreclosure on the Rise. Self-employed borrowers Not Able To Refinance.
Self-employed borrowers may be affected more by the ongoing upheaval in the mortgage industry. Many of them seem to know this fact already. The most asked question from business owners and independent contractors is “How Will I be Able to Qualify for a Refinance in Today’s Market?”
There is no easy answer but I am going to discuss how business owners and other self-employed people can protect themselves from a possible mortgage by locking in fixed rates with flexible payments today and preparing the refinance documentation requirements of tomorrow.
How Much Harder is the Mortgage Market Nowadays?
Many self-employed homeowners are seeing the mortgage market getting tougher on credit scores and are seeing “stated” or “No documentation” mortgage programs being phased out. They allowed thousands of self-employed people to secure and refinance mortgages in the past and are now worried that they may not be able to refinance or buy a new home today or in the near future.
These are some of the ways in which the self-employed people may become the most prominent victims of what industry pundits are calling a “mortgage meltdown” referring to a situation where they will be unable to qualify for mortgages they are already in which are for the most part variable.
Compared to other borrower categories, self-employed people and business owners are likely to be categorized under variable rate mortgages which expose them to the risks of the next few years of home prices levelling off or falling and the interest rates rising.
Why is it Getting Tougher?
While it is true that self-employed people and business owners have had it pretty easy up to the Global Financial Crisis (GFC) with loose lending standards enabling many of them, myself included, qualify for loans which would have been rejected by other lenders.
In most cases, self-employed borrowers enjoy a stronger income than their wage-earning counterparts. So, why do banks give self-employed homeowners have such a hard time? It all centers on one word: Documentation.
Self-employed people usually have a hard time producing the type of documentation the bank usually needs from the mortgage applicants. This is because of the fact that underwriting guidelines became significantly stricter in 2008 than the guidelines required before the GFC.
What Would be the Best Strategy?
We cannot cover all of the topics of alternative documentation to business owners within the scope of this article alone because it is a complex topic. However, there are some documentation standards out there now and in the future to enable self-employed borrowers to qualify for refinancing today and continue refinancing in the future.
We will try to do this by giving you five key factors self-employed borrowers can follow to qualify for mortgage refinancing today and in the future.
The best thing to do is to look for an experienced professional mortgage broker who specializes in self-employed loans. This is the professional who will walk you through the current requirements. I hope this article has given you some hope of getting a mortgage without having to worry about your self-employed status.Read More