Home Loans for the Self-Employed
Loans for SMEs
Self-employed or SME (Small to Medium Enterprises) often have difficulty in gaining approval for a Home Loan. The reasons can be varied, but for standard loans, lenders rely on the traditional verification methods of tax returns and financial statements in their loan assessments.
Other reasons can be that they generally have lower living expenses, because the business pays for many expenses, such as motor vehicle, communications, superannuation and in some cases even food.
Lower living expenses generally means greater affordability in borrowing for personal use. However, most lenders are required to assess living expenses at a certain level, irrespective of the client’s circumstances – this is called “HEM” (Household Expenditure Measure). It is a generic measure of an average person’s living expense, given their family situation and income levels. However, in short, the lender will use the higher figure of HEM, or the loan applicant’s declared actual living expense.
Loan Documentation
The documentation requirements to verify an SME’s income for a standard loan can be extensive. There is no standard measurement of an SME’s income for loan assessment purposes. Each lender has different assessment criteria. Please contact Paul to obtain more information on loan affordability.
For example, some lenders average of the last two years directors income +/or profit of the business, depending on the nature of the business structure. Other lenders will use the lower of the two years income, whilst others will just use the most recent years income only.
Lenders generally ask for two years of full financial statements and tax returns, to assess affordability. This is in addition to the standard requirements of bank statements, statements for existing debts and other commitments and liabilities.
By providing a full set of documentation and demonstrating the ability to successfully service the proposed loan, it is possible to negotiate a very competitive interest rate with the lender.
