The short version
- Most lenders treat freelancers as self-employed, so you'll usually need two years of tax returns.
- Some lenders accept one year, or a low doc loan using bank statements or BAS instead.
- Lenders look at your income after expenses, so big deductions lower what you can borrow.
Since regular cash flow is an essential prerequisite for getting loan approval, some banks are cautious about lending to people who aren't employed full-time. This means that freelancers may have a hard time taking out a home loan.
However, because freelance work has become more common in Australia, several lenders offer home loans that suit freelancers.
If you're a freelancer and you're wondering how you can finance your home, this guide is for you.
What is a freelancer home loan?
A freelancer mortgage is a home loan available to freelance workers.
Freelancers work independently or are self-employed and usually get paid per individual job or project instead of full-time employment with a set income.
Because this work can be unsteady, banks and many lenders consider freelancers casual workers. This means that freelancers may experience a reduced borrowing capacity when taking out a loan.
While securing finance as a freelancer may seem challenging, loan options are available specifically for this type of worker. These loans give self-employed people and freelancers a way into the property market.
How much can I borrow if I'm a freelancer?
You might be wondering how much money you can borrow as a freelancer.
The answer is that it depends. If you meet specific loan criteria and are approved for a freelancer home loan, you will be able to take out loans with high loan-to-value ratios (LVR).
An LVR represents what percentage of a property's value you can borrow. Freelancer home loans can have a LVR of up to:
- 80% LVR. To qualify for this option, you need to prove that you have the required income and that you can make the deposit. You don't have to pay the lender's mortgage insurance (LMI). LMI applies to loans with a LVR of more than 80%, and the lowest interest rates are usually for loans at 80% or less.
- 90% LVR. This will include LMI fees. This option is available if you have a good income and pay your current debts on time.
- 95% LVR. To apply to get a loan with a 95% LVR, you need to meet stricter requirements. You need to have a good income, a clean credit history, minimal debts, a reasonable asset position, and 5% of the amount in genuine savings.
- 100% LVR or more. You can borrow up to 100% or more if you get a guarantor home loan. A guarantor is a relative who offers part of their home equity toward securing your loan. This means that if you cannot pay your loan, the guarantor will need to pay it for you. Once there is only 80% of the property value left to pay off, you can apply to remove the guarantee from the loan.
What lenders look for
The bottom line is lenders want to ensure that you can pay back the amount borrowed within the loan period. This means that lenders primarily look for a steady, sufficient income and a good credit history.
When applying for a freelancer home loan, you also need to prove that you are working as a freelancer. Documents you may be required to provide include
- At least three of your most recent bank statements.
- Tax returns for the previous two years (both personal and business).
- Most recent ATO notice of assessment.
Additionally, most lenders require that you have been self-employed for at least two to three years to show that your income is consistent. This is not a hard rule, though; in some cases, loans are considered for individuals who have been self-employed for only a year.
How to get a home loan approval as a freelancer
If you meet all the requirements to apply for a home loan, you might still be looking for ways to boost your chances of being approved.
As a general rule, the cleaner your credit history and the more consistent your income, the more likely you are to receive loan approval.
You may also be more likely to be approved if you qualify as a self-employed borrower. To do this, you'll need to have an Australian Business Number (ABN) as well as completed financials for at least the previous two years.
Cancelling unused credit cards and paying off any outstanding debt are also good ways to improve your financial image and boost the chances of your loan being approved.
Benefits of using a home loan broker
If you're not sure how to find a home loan that suits your situation, consider consulting a broker.
Brokers have experience in financing and can give you expert advice. They will do much of the work for you, comparing loan options so you can make an informed decision, and must act in your best interests by law.
Each loan application is recorded on your credit report, and several in a short time can make lenders cautious. A broker prevents this by reviewing the lender's policy before applying.
You'll find that brokers also have more flexible consultation and appointment times than most major banks, so you can discuss your financial plans when it suits you.
Verdict
While getting a home loan as a freelancer can be challenging, there are good financing options for self-employed people.
With the right documents, you may be able to borrow as much of the property's value as a full-time employee could.
If financing your new home sounds daunting, consider consulting a broker to see how they can simplify the loan application process and help you choose a loan that suits you.