mortgage when self-employed Archives

We hear the phrase “My mortgage application was declined” on almost a daily basis. With the current tight lending rules, having a mortgage application declined by the bank is an all too common occurrence. It can be very discouraging, but don’t lose hope; there are usually options available to overcome your home loan obstacles.

It is not over if your mortgage application was declined

It’s usual for a bank to require a 3-6 month stand down after they decline an application, after which you can reapply. They’ll inform you of the actual period as part of the application process. But (more importantly) there is nothing to stop you applying straight away with another lender. The key thing is to understand why you were declined by your initial chosen lender. You can then take any action needed to rectify the issues.

The importance of using a mortgage broker

We realise that a mortgage broking company saying you need a mortgage broker is hardly impartial advice. But our reasoning is compelling. Your mortgage broker will be able to look at your situation and walk you through why you were declined previously. They’ll then be able to advise you on what needs to be done to be successful in getting a home loan. They’ll look across all lenders, and with their industry knowledge of what the current acceptance criteria is from lender to lender, they’ll know where you are likely to be approved. This is huge, as lending criteria is individual to each lender and it changes all the time.

Understand why your mortgage application was declined

The majority of applications get declined due to one or more of the following reasons:

Not enough deposit
Not enough income
A bad credit score

Once you understand why you were declined, you can discuss with your mortgage broker whether a different bank may accept your application. The banks each use different formulas when assessing whether a mortgage meets their “affordability” threshold. An application could be rejected for not enough income at one bank but accepted at another. Banks sometimes offer mortgages at under 20% deposit, your mortgage broker will know if this is an option currently available and whether you would meet the criteria.

If none are likely to, that leads us to…

Banks aren’t the only option when looking for a mortgage

The stringent lending rules among the banks can mean that an applicant who is perfectly capable of servicing a mortgage still gets declined by the banks. This is where a non-bank lender/second tier lender can be a good option. They accept many applications that the banks decline. The flipside is they charge higher interest rates, but many people find it a worthwhile compromise to get on the property ladder.

If you do go with a second tier lender, make sure to make a financial plan to get yourself in a position to move to a bank within a couple of years to avoid paying higher interest long term.

Non-bank lenders are often a good fit if:

You’re newly self-employed. Usually the banks don’t approve lending to someone who has been self-employed for less than two years.
Your income doesn’t meet the banks’ standards (but is still high enough to service a mortgage without hardship).
You don’t quite have enough deposit for the banks.
You’ve been recently discharged from bankruptcy.
You have a low credit score.

What to do if you don’t currently meet the lending criteria or your home loan is declined

Next steps if you don’t have enough income

Reducing any debt is often the best place to start increasing your income. The banks minus any loan repayments when calculating your mortgage, and they assume the repayments will continue indefinitely. So if you’ve got any loans close to being paid off it could be worth doing so sooner rather than later. Of course, this could eat into your deposit so it’s a balancing act.

The banks also assume any credit cards or overdrafts will be maxed out. Therefore they calculate your income on the basis you will be making the maximum payments each month. They don’t take into account whether or not you pay your credit card off each month. Reduce your credit limits where possible, or better yet, cancel your credit cards and overdrafts.

Beyond reducing debt, increasing income can be tricky. Kiwi’s aren’t great at asking for a raise but if you can find the courage then it could be the difference between getting your own home or not. Look for opportunities for career progression within your job or even a job change if it will provide more opportunity and salary. We know these are not easy changes to make! If you do decide to go for it, make a plan and break it down into steps. Focusing on one step at a time will make the big moves feel much more manageable.

Next steps if you don’t have enough deposit

If you don’t have enough deposit, make sure you’ve looked into using your KiwiSaver and whether you qualify for the First Home Loan or First Home Grant. If it’s a matter of saving more, then make a budget and put savings aside regularly. An automatic transfer of your budgeted savings to a separate account each pay day can really help you stay on track.

Next steps if you have a bad credit report

As advised previously, second tier lenders are often a viable option for those with bad credit scores. Don’t assume you don’t have borrowing options without first speaking to a broker.

If you have a bad credit score, make sure you check the details are correct. It can be a challenge to get them rectified, but is worth pursuing it if it changes your score from bad to good.

If your report is correct then it becomes a matter of improving your credit score. This means reducing credit limits, paying bills on time and paying off hire purchases! You could even consider completing a debt consolidation to reduce the overall interest rates being paid.

Ultimately, the steps you need to take and the options available to you when applying for a mortgage are very much dependant on your specific circumstances. So we hope we’ve convinced you that a mortgage broker is advisable whenever you are looking for a mortgage, but especially so if you’ve been going it alone and have had a mortgage application declined.

Platinum Mortgages specialises in mortgage solutions for those who can’t get straight forward approval from a bank. Reach out for a no-obligation chat about your circumstances and whether we can help.

Is getting a mortgage if self-employed for less than 2 years possible? Yes! Getting a mortgage within the first two years of being self-employed can be a challenge, but possible. However, if you recently took the leap and become self-employed, congratulations! Fortune favours the brave. There are many benefits that come with being your own boss, as well as some challenges.

Suddenly, getting approval for your holiday leave is very easy (although finding the time may be harder). But getting a mortgage within the first two years of being self-employed can be a challenge. That’s where having a good mortgage broker can make buying a home both possible and much easier.

In this article we’ll take you through how you can get into your own home without giving up being your own boss. That’s where having a good Mortgage Broker can make buying a home both possible and much easier.

Do banks approve loans when recently self employed?

Generally speaking, the banks require you to be self employed for more than two years. If you are self-employed, the banks will require:

Two full years of accountant financials;
Two years of IRD Tax Summaries.

The exception is when you’re not relying on your self-employed income to pay your mortgage. Of course that doesn’t apply to many people. But don’t worry, there are other options! Otherwise, this would be a rather short article.

Self Employed Mortgage for small business

If the banks say no, how do I get a mortgage?

This is where non-bank lenders (otherwise known as second-tier lenders) really show their worth. They can provide home loans to people who have been trading for as little as six months.

Platinum Mortgages deals with non-bank lenders who provide a genuine ‘low doc’ mortgage for our self-employed clients. This means less documentation is required to support your application compared to a bank. This reduces both time and stress on your part. Even better, no financials are required.

As a bonus, applications are processed promptly by our non-bank lenders. That’s no small thing these days, when the banks are often taking a long time to approve applications. Delays can cause a lot of stress for a client when they have put in an offer subject to finance. This is especially true when the property is nearing its deadline date.

Our non-bank lenders have a great track record in facilitating an easy finance process. We love seeing the benefits this has for our clients’ home-buying experience.

What do I need to get a home loan approved?

Recently self-employed can get a home loan approved, and here is how. At a minimum you need:

A trading period of 6 months
Your declared income must be within industry norms
Maximum 80% loan to value, subject to property type and location. This means the lender will need to approve the property you want to buy, just as a bank would.

Why can a non-bank lender give me a home loan when a bank can’t?

The non-bank lenders approve higher risk applications because they balance the risk out by charging a higher interest rate. This can sound a bit scary for clients. However, it’s a matter of calculating whether the cost is manageable and reasonable to get you into your own home. We help you understand how interest rates impact your mortgage payments. This way, you can factor it into your budget.

Non-bank lenders are a great as they to enable you to buy a home while you set up your business. After the two-year period is up, that’s the time we can help you move to a bank home loan with lower interest rates if your income and accounts are in order.

As to whether it’s worth paying a higher interest rate now or waiting to have been self-employed for two years to buy a home, no one can answer that for you. What we can say is, historically it’s how long you’re in the market that’s important, not when you buy your property. Meaning, it’s the amount of time you own property, rather than the timing of when you buy property, that gives the payoff on investment for most people.

How do I prepare for a loan at a bank after the two years?

The key thing is to have tidy and accurate financials for the two-year period, prepared by an accountant.

Warning: Don’t get tripped up by your tax returns

Being self-employed, you’re no doubt aware that how you treat your income and expenses determines how much tax you pay. Your accountant will most likely try to present your financial accounts in a way that reduces your tax bill. Ultimately, this means they will (where possible) reduce the income side of the balance sheet by increasing the expense side.

Unfortunately, this is usually the opposite of what you need to show to get a mortgage from a bank! You want your documented income to be as high as possible to prove that you can pay your mortgage.

This also means that any “cash jobs” (which we’re sure you never do) don’t get counted as income and detract from your ability to get a mortgage with a bank.

Platinum Mortgages is experienced in reading financial accounts and have skills in extracting several items within them that can be added-back into the income side. So, we can help you ensure that your accounts are in a good state to get you a mortgage at a bank once you’ve been employed more than two years. We’d love to talk with you about your plans and how we can help you buy your own home.

Tag Archives: mortgage when self-employed

How soon can you re-apply after your mortgage application was declined?