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How to get a mortgage when you can’t prove your income

For most people, getting a home loan means doing a budget, filling in forms, and printing out some payslips. The only hard part is finding a home that you like – and can actually afford.

But if you’re running a small business, or working as a freelancer or contractor, things can be a bit more complicated. Banks are wary of lending to people without regular, guaranteed income – which can make the application tricky.

The good news is, getting a mortgage when you’re self-employed is doable – you just need to work a bit harder to convince the bank to lend to you.

Proving your income

When banks are thinking about lending you hundreds of thousands of dollars, they want to know you’re able to make regular repayments. If you’re working for a company and you receive a salary, you make the same amount of money each month – apart from overtime or bonuses. This makes it easy for the bank – they can see exactly how much money you have coming in, and lend accordingly.

But if you’re self-employed as a business owner, contractor, or freelance worker, your income can vary wildly depending on the month or week – if you’re waiting for an invoice you might have a low month, if you’ve just received a big payment you’ll have a higher income for that period. This can make banks jittery, as it’s harder to see whether you can afford mortgage repayments in the long-term.

That’s why most banks require one or two years of full financial records from self-employed people applying for a mortgage. They want to see long-term income and trends over time to make sure you’re able to repay your loan.

This can make things complicated if you’re self-employed – particularly if you’ve just started your own business. Those first years in business often involve low profits and high set-up costs, which doesn’t look great on a loan application.

Other ways to get the bank on board

Financial records alone may not be enough, but there are other ways to convince your loan manager to approve your loan.

Getting your finance team – or a contractor – to prepare cash-flow forecasts can help support your application if you have less than two years of financial records. These can show upward trends that may not be obvious from your basic records.

It’s also important that you’re able to explain and justify your financial history. Dramatic dips and rises in sales numbers, or large expenses, can give a lender pause – but if you have a reasoned explanation, it could make a difference.

If you’re a contractor or freelancer rather than a small-business owner, consider putting together a brief rundown of your experience and qualifications in your industry. This helps assure the bank that you’re able to keep getting contracts or freelance work in the long term.

Looking beyond the banks

Sometimes, no matter how much documentation you provide, the bank says no. If you’re turned away but still believe you can afford a mortgage, approaching a non-bank lender is the next step – these lenders often have more flexible lending requirements than traditional banks.

However, non-bank lenders also have their downsides. They may require a higher deposit to approve your loan, and often charge higher interest rates – which will clearly cost you more over a 25 or 30-year loan term.

To get around the interest rate issue, you could start with a loan from a non-bank lender, then refinance with a bank in a few years, when your income qualifies for a traditional mortgage.

Making more of your business

Finally, if you’re struggling to qualify for a loan from a bank or alternative lender, you could go back to the drawing board and work on your income. If you’re running a business, focus on maximising your profits for six months, so you can show the bank an upward trend when you apply again. You’ll pay more tax for the period, but this should be offset by getting a lower interest rate with the bank.

If you’re a contractor or freelancer, think about extending your hours, finding new clients, or even applying for salaried jobs – just make sure you’re happy with any changes in the long run. With six months or a year of increased earnings, you might just qualify when you apply for a mortgage again.

Home loans are possible

It may be tricky to get a home loan when you’re self-employed, but it’s certainly possible – as long as you’re prepared to document your income and consider non-bank lenders.

Self-employed and need a mortgage? Get in touch with a Global Finance broker for expert advice and help with your application.