Being a sole trader comes with perks, such as being your own boss, having flexibility in your work hours and having the ability to earn a higher income. However, as a sole trader, the process of applying for a home loan can be more complicated than that of a PAYG employee.
The process is different for a sole trader, but that definitely doesn’t mean it’s impossible.
Sole traders should make some specific considerations when looking to apply for a home loan in 2022. For this, I offer three pieces of advice:
1. Don’t tunnel vision to a specific interest rate.
Many sole traders who do their own books will often fall in love with the lowest interest rate, as opposed to finding what is best for their situation. It can be easy to get stuck on a specific rate without looking at the details of the home loan such as the documentation needed to be submitted. You must be lender agnostic when it comes to borrowing money; whilst some lenders may offer the lowest rate, they will also peer over every single transaction you might have made in the last 24 months.
If you’re balancing your own income and outgoings it can be tempting to only look for the lowest interest rate. But the lowest rate doesn’t always mean that it’s the right option for you. It’s important to consider all the other aspects of the contract you are entering into or you might find yourself in trouble in the future.
2. Gather your documentation
Getting all your documents together to submit with your application will give you a better chance of being approved. Although, the list of documentation you will require as a sole trader is more comprehensive than a PAYG employee requires.
As a sole trader you will require:
- An ATO notice for the period you are applying for.
- BAS statements.
- Tax returns.
- Financial information statements such as profit and loss statements, balance sheets, and business transaction account statements.
If you can’t get this documentation together you will need to apply for a low doc loan. As the name suggests, this is a loan that requires less documentation. A low doc loan comes with some drawbacks.
A low doc loan generally requires a larger deposit for your home loan and is subject to higher interest rates and a higher lenders mortgage insurance.
3. Consider how long you’ve been in business
Lenders will require you to have been running your business for longer than two years. However, if you have been running your business for less than two years but have been working in the same industry that your business currently operates in you may be approved. For example, if you are a builder that has been running your own business for one year, but have been previously employed as a builder you could be approved.
If you can prove that you are able to make a stable income in the industry that you operate your business in you may be able to negotiate some details of your home loan such as your interest rate or minimum deposit.
If you have owned your business for less than two years and previously worked in a different industry you may need to apply for a low doc loan or wait a bit longer before applying again.
Being approved is not impossible. Although the process of applying for a home loan is a bit more complicated for sole traders, it’s still completely possible to make your dreams of owning your own home a reality.
It is important to be patient, persistent, and seek advice from a professional broker to help find the best option for you.
By speaking to a broker who is connected to several lenders that look at alternative options you can both increase your borrowing capacity and may save thousands of dollars.
