If you’re self-employed or own a business, there’s good news on the table if you’re looking to buy a residential or commercial property. I’m going to deliver the news in a “sandwich”.
Back in the halcyon days when I worked in the accountancy profession, the firm’s Partners advised me that as a manager, I should deliver any bad news to mentees as a so-termed “good news sandwich.” That is: good news, bad news, good news.
Thankfully today I don’t have too much bad news to deliver, so let’s kick off with some good stuff!
Credit is easily available
Firstly, I’m happy to report that lenders are presently very willing to lend to self-employed persons or small business owners for property purchases where the borrower is able to prove sufficient income to meet existing commitments and ongoing personal living costs, in addition to the loan applied for.
The thin slither of bad news ‘filling’ in today’s sandwich is you may on occasion encounter a slightly more involved process in getting housing finance. Of course, you’re probably already familiar with overcoming hurdles and detailed paperwork, and so hearteningly, this additional hurdle may not be a struggle.
Completing today’s sandwich with another thick slice of good news. There are clearly defined steps that you can take to maximise your odds of purchasing that property.
1. Pay attention to the numbers
To get to where you want to go as a borrower, it’s first important to know your numbers in some detail. This means sitting down with your mortgage broker or potential lender in order to determine what level of taxable income you may need in order to qualify for mortgage finance. Paying attention to the numbers is your starting point. Then you can tackle the next step.
2. Planning and preparing
The real key to obtaining the mortgage finance you want is largely in the planning. Being fully prepared with up-to-date financial statements and records puts you in a position of strength.
Peter Fraser, Senior Loan Writer of Brisbane Business Finance explains: “Although there tend to be subtle differences between lenders, banks typically require the most recent two tax returns and sets of financial statements to make an assessment of the borrower’s income.”
“Naturally, lenders prefer to inspect the latest set of financials and like tax returns to be not more than 18 months old, although it’s true that for clearly strong borrowers they may relax their approach a little.”
Let’s say, for example, that an application was lodged today for the owner of an incorporated small or medium enterprise (SME).
Explains Fraser: “In this instance the lender is likely to request finalised 2012 and 2013 company tax returns, the equivalent financial statements, and personal tax returns for the Directors and their ATO assessment notices.”
“Banks typically allow the standard add-backs applying to business financial statements, such as depreciation or Director wages and related party payments. Where 2013 tax returns are not yet available, then it is still possible to obtain finance through the use of a ‘low doc’ (low documentation) loan.”
Low doc loans are likely to require the borrower to self-certify their income and have a clean credit history.
Again, in this circumstance for business owners, the lender may still request up-to-date profit and loss statements, copies of 12 months of BAS returns lodged and a copy of the Australian Taxation Office business portal printout in order to calculate the income of the business.
3. Choosing products
Of course, each lender and each mortgage product is slightly different from the next, which is why a skillful broker can help to guide you through the maze.
Most lenders will look favourably upon consistency of income, and thus a person or a business owner with a steady flow of earnings may find the terrain easier going than an applicant with fluctuating earnings or inconsistent cash flows.
In the case of fluctuating income, a lender may be inclined to using the lowest relevant figures. However, such borrowers should not immediately become disheartened. Working closely with your accountant and mortgage broker, you may be able to establish that certain business costs are non-recurring, such as start-up costs or the replacement of fixed assets, and these may be excluded in serviceability calculations.
One wrinkle for self-employed mortgage applicants is that sometimes their accountant has been rather too successful at minimising taxable income at tax return time, which can then hamstring a subsequent mortgage application.
4. Persistence pays
As in so many areas of business and life, it is important to remember the power of persistence. If one lender turns you down, try another.
From my own position as a business owner, I once bought a property in London while living in Sydney that took me 12 months to purchase from the start of the process through to the completion. It was a drawn-out process and a stressful experience at times, but persistence paid off in the end. And it can for you too.
Finally, successful borrowers can enjoy the most exciting part of the process: sourcing and buying the property. Remember that when it comes to acquiring real estate for a home, a business or as an investment, detailed research is crucial, and an optimal outcome always comes down to the 3 Ps: the price, the position and the property.
Enjoy the spoils — you’ve earned them.