Owning a home is a dream for every hardworking person. For every person who has a permanent job with an employer, would find it easy and simple to get a loan approved. But this is not as simple for people who are self-employed. There are several documents needed to get a loan approved related to employment and finance. Many of those are not available when a person is self-employed.
So, if you are self-employed, getting a mortgage or a loan may be really complicated. But just because it seems complicated, it does not mean it is. There are several options that you can consider, and several policies specially designed for all kinds of self-employed people. All you need is to sort out your finances and do your research. No matter how regular your income is or how much you earn, there are always some hoops that you need to jump through while applying for a self-employed home loan.
This does not mean that all self-employed people will struggle to get loans, but it just means that a self-employed person needs to work a little more to finally get a loan approved. The first step is to sit down and establish what taxable income level you need to apply for credit. Take the help of a broker for this if you are confused. Sometimes, it so happens that with so many people giving varying pieces of advice, you get confused and stuck. So, to make sure that does not happen, here are the answers to some generally asked questions for self-employed home loans:
1. What are the documents required?
The self-employed loan is also known as a low-doc loan in general terms. This means the documents required are minimum – that consists mainly a proof of your tax returns and periodic earnings.
2. What is the minimum period of employment required?
Majority of lenders require a minimum 2 years of self-employment. But in case you are self-employed for less 2 years, the lenders look into your assets and see if you have been employed in the same line of work before being self-employed. You can also provide the saving you have from your previous job as a proof that you can afford the loan.
3. How is the income calculated?
Most lenders take into consideration previous tax returns to predict how stable the business will be in future. But this can vary from bank to bank. Some may take into consideration your most recent year’s income, the last two year’s income, or the average of all the incomes.
4. What does “add back” mean?
There is a difference between the taxable income and the actual income that you can use to pay your loans and commitments. While considering your income to determine your borrowing limit, lenders take into account such expenses that you have incurred in the past that reduced your taxable income but those expenses would not exist in the future. This is called the add back value and with this the assessable income is increased, thereby increasing your borrowing power.
5. How recent should be the tax returns?
The tax return documents of the most recently completed financial year are generally acceptable unless you are applying for the loan while the financial year has just ended, and the process of the tax returns has not been completed, in such cases, the most recent one was available.
These are some basic doubts that arise while planning for self-employed home loans. If you are aware of the basics, you can work hand in hand with the broker and land the best loan that you are eligible for.