Getting a home loan can be a stressful time for anyone, more so for those who are self-employed or run a small business. Banks and lenders want to see steady income that can cover any repayments you will need to make and being self-employed or in charge of a company can mean fluctuations in cash flow.
Applications for self-employed people looking for home loans has halved since the financial crisis of 2007. This could be because many people have shied away from running their own business since the recession or down to the fact that banks and lenders are increasingly stringent with documentation and credit reports making it ever harder for self-employed workers to get on the property ladder.
Show Excellent Saving Habits
The same can be said for any person or couple looking to secure a home loan, and you must be strict and disciplined with saving money. Regardless of how good your saving history has been, in the years leading up to seeking a loan on the property you must adhere to saving money regularly at a consistent basis. Showing you can save money will let the lender know you will be able to afford the repayments on a home loan and that you are in control of your personal finances.
Showing diligence with managing your money will always help when seeking a loan from a lender, whether its a credit card, car or home loan.
Seek Pre Approval
Pre-approval is when you speak with a lender and secure an amount you can borrow before viewing any properties. Having solid knowledge of what you can borrow will help when negotiating prices and will put you in a good position as a ready-to-buy customer. Pre-approval loans can be obtained in a similar way as a standard loan, by sending all your documents, proof of finances and expected income to a lender to review.
Self-employed people without pre-approval may find it harder to negotiate prices when viewing properties as the homeowners will know you are self-employed and still seeking loan approval, which can be hard to obtain.
Audit and Document Everything
Any lender will always want to know that you have paid all taxes due and are not owning money on invoices or to contractors, so having all your documentation is vital. You will, of course, need to have your personal financial documents in order along with a history of savings and previous money that has been deposited into your account. Having your business accounts in good shape will help to prove you are on top of the finances at your business and at home, which puts you in good stead for being accepted. For those who manage their own company books, it may be advisable to get an accountant or auditor in to guarantee that you are showing possible lenders perfectly managed accounts.
Once your documentation is in order, you can then confidently approach a banking institution or lender. Depending on your location, you even have the option to start shopping for loans online. A number of lenders these days provide useful tools that help you accurately gauge your borrowing power and you can use the available information to tailor the ideal home loan to your circumstances.
As with any large loans from banks, if you can put a sizeable deposit down, it helps them lend money easier. The main reason that self-employed workers struggle to secure home loans is that a lender is unsure how much money you will make in the coming years. For employed workers that have a steady salary this is easy to define, but can be harder for those who are only projecting potential earnings.
Being able to place a deposit of over 25% will give any bank confidence that you can make repayments and that you have enough “skin in the game” to make sure you do. The higher the deposit you can accumulate, the better your chances of having a successful application.
There is an abundance of tools and services where we can get detailed credit reports and advice on how to improve credit scores online. These should be used as it is a waste of time turning up to a home loan appointment when you have not done all you can in making sure your credit history portrays you as a sensible, financially responsible person.
Small changes to how you live can generate significant changes in your credit history. Paying off all credit cards and store cards in full each month, or ensuring that all bills have been paid on time all add incremental improvements to your credit standing and will be taken into account when it comes time to seek finance for a home.
Getting approval for a home loan when you are a small business owner or self-employed will be challenging, but with a little effort and severe scrutiny of all your financial documents will make it simpler. An ability to save money consistently, document it thoroughly and time spent reviewing and improving your credit history will always give lenders confidence that you can make repayments on time.