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With interest rates low and house prices taking off in Sydney and Melbourne, commentators have claimed that lending criteria has slackened and borrowers are taking home loans they can’t afford.

I don’t agree. Lending criteria is as solid as it has been since the global financial crisis and most borrowers are borrowing no more than 80 per cent of the property price. Mortgage defaults dropped throughout 2013 according to the Fitch rating agency, with just 1.25 per cent of mortgages more than 30 days in arrears.

Surprised by this talk of easy credit are the self-employed and contractors, many of whom find it as hard as ever to get a home loan. For these people, the claims about easy mortgages are simply fantasy.

The good news is that mortgage lenders do have loans for self-employed people, contractors and business owners, so long as you can substantiate your income.

Here are a few tips:

???????????????????????? Full doc: Self-employed people don’t always need a ”low documentation” loan, with the higher interest rates those mortgages carry. ”Low doc” simply means alternative forms of income confirmation (bank statements, financial statements, accountants’ declarations) as opposed to PAYG slips and tax returns. If you have tax returns you should be pursuing a full documentation loan at standard rates.

???????????????????????? Have income: Showing income to afford the loan is just the start; when you subtract monthly expenses you must have cash left over to service the loan. This is called serviceability.

???????????????????????? Work on serviceability: Build a history (at least six months) of low expenses and high income. Lenders and brokers are obliged to confirm both, so it is important to establish a solid track record.

???????????????????????? Reduce debt: Eliminate or reduce your consumer debt. Lenders count the limit on your credit cards as money owed, not the balance.

???????????????????????? Show savings: A savings history means you’re serious about the loan and you live within your means.

???????????????????????? Be concise: Provide the documents the lender or broker asks for. They may include BAS statements, tax returns, bank accounts and perhaps a declaration from your accountant.

???????????????????????? Do your taxes: Keep your taxes up to date so you can always show your most recent income history. And make sure the tax assessments are paid. Self-employed applicants usually have their tax portals checked for taxes outstanding.

???????????????????????? Understand your structure: Understand how your business structure affects your personal income and what happens to your borrowing power if your taxable income is too low.

???????????????????????? Have a strategy: Consider consulting with a mortgage broker or a loans manager to formulate a plan for buying your property. This allows you to build your serviceability based on expert advice.

???????????????????????? Build a good record: Once you have a mortgage it can be used to consolidate debt or refinance to a better loan. However, you must have a good record with that loan. Of interest to subsequent lenders will be a history of on-time payment and extra lump sum payments you made.

Finally, be open with brokers or lenders. They are required to verify what you say and perform checks on the documents provided. If you don’t tell the truth, you could end up with a loan that you can’t afford or nothing at all.


Posted by Mark Bouris – The Sunday Age on 1st July, 2014