Sole trader? Side hustles? Here’s how to prove your business income

Article summary

Many Australians earn through ABN work, side hustles or sole trading, which makes their income look irregular on paper. This guide explains how lenders assess that income and what you can provide to strengthen your home loan application.

In this article

1. Why irregular income can be a challenge for getting a home loan
2. What lenders are looking for
3. Documents you’ll need to prove irregular income
4. Full-doc vs low-/alt-doc loans
5. Practical tips to strengthen your application
6. Preparation is key

Roughly two in three Australian businesses are run by sole operators, and survey data suggests that one quarter to one third of Australian adults currently have a side hustle or similar extra income stream. And the one thing each of these individuals have in common is irregular business income.

Australians who work under an ABN as a freelancer, sole trader, contractor or solopreneur don’t typically have traditional payslips to prove their income to potential lenders. Yet, they still want to own homes. And they should! There are many lenders that are open to lending to these types of borrowers. However, they still need to find a way to prove their income.

Understanding how lenders assess irregular income (from ABN work like side hustles or self-employment) is the first step. The next is documenting it properly.

Why irregular income can be a challenge for getting a home loan

Home lenders evaluate mortgage applications based on risk, and the biggest question they’re trying to answer is simple – can you comfortably repay the loan? Before they bring you on as a borrower, they need to be able to see that you can do just that.

When you don’t have the typical paperwork to supply to a home lender, it can feel like the process is stacked against you before you even begin. How do you show a lender that you’re a good bet for a home loan, when you can’t even show what you earn.

Another challenge is that self-employed and casual earners often have ‘lumpy’ income – this is income that tends to fluctuate month to month. One quarter might bring strong revenue while the next is leaner. This variability can raise questions, and lead lenders to scrutinise self-employed applications more closely to ensure your income is stable enough.

But just because your income is irregular, doesn’t mean that getting a home loan is impossible. With the right documentation and presentation, not traditional earners can absolutely get home loan approval.

What lenders are looking for

When you don’t have regular payslips, lenders turn to other signals of financial stability. Here’s what lenders are looking for:

• Consistency over time. Lenders will need to see at least two years of self-employment history under your ABN, whether you’re applying for a full-doc or low-doc loan. A track record of stable or growing income also helps show the business is viable and ongoing.
• Sustainable earnings, not just a good month. A single high earning month isn’t going to be enough. You’ll need to be able to prove that your income is repeatable and sustainable.
• Clear documentation. Without regular payslips, lenders require more comprehensive paperwork. This might be tax returns, account statements, profit-and-loss records, or other evidence to demonstrate what you actually earn.
• Reasonable business expenses and deductions. If you’re deducting a lot in business expenses (and many sole traders do), your taxable income might look low. This could be a red flag and make it more challenging to get a loan. Some lenders, however, do allow add-backs of things like depreciation or your salary to better reflect your cash flow.
• Business viability. Lenders may also want to assess the nature and health of your business which could involve looking at trends in turnover, profit margins and whether your business appears stable or risky.

Documents you’ll need to prove irregular income

Because your income isn’t a regular wage, lenders often ask for more comprehensive paperwork to prove that your business, and income, is stable. Some of the documents they may ask for include:

• Personal and business tax returns usually for a two-year period and the corresponding Notice of Assessment from the tax office. These documents together show your declared, taxed income and gives the lender a stable number to calculate serviceability.
• Profit and Loss statements and (if applicable) your balance sheet. These are required for businesses structured as a company or trust. For sole traders, your personal tax return is typically all that’s required. These reports help to show your revenue versus expenses and your net income after deductions.
• Bank statements (personal and/or business), typically for the past six For full-doc loans, lenders generally require personal bank statements only. For low-doc loans, lenders will generally request both personal and business bank statements. These show your actual cash flow and regularity of deposits.
• Accountant’s Letter (or declaration). This is a formal letter from your accountant that summarises your business income and financial position. It can also be used to explain any part time or irregular earnings or deductions. This letter can be especially helpful if your financials or tax returns don’t reflect your true earnings or earning capacity.
• ABN and business registration proof and history. This history shows that you have a legitimate business, how long you’ve operated and that your income is stable and likely to continue. In most cases, lenders require a minimum of two years of ABN registration history.

Depending on the lender and loan type, they might ask you to supply all or just some of these.

Full-doc vs low-/alt-doc loans

For self-employed borrowers, or borrowers with irregular income, there are generally two pathways to getting a home loan – full doc or low/alt doc loans.

Full-doc loans

Full doc loans are the most straightforward from a lender risk perspective. But they’re also the most paperwork heavy. These are standard mortgages or loans, and so they require all the same documents to fully verify your income and ability to repay. So typically you’ll be required to provide most of the documents described above, including:

1. Two years’ worth of tax returns and Notices of Assessment
2. Profit and Loss statements and balance sheets (for companies and trusts)
3. Personal bank statements (typically six months)
4. BAS, if applicable
5. Sometimes an accountant’s letter or other supporting documents

Though all the paperwork can be a downside to these types of loans, because they give lenders a full financial picture, you’re usually able to get a better deal. For example, full doc loans usually come with the best interest rates and the most favourable terms.

Low-doc / alt-doc loans

These loans are designed for people who struggle to produce all the paperwork required for a full-doc loan. This is usually true for newer ABN holders, freelancers or businesses with fluctuating income. Instead of tax returns and full financials, lenders may accept:

1. Recent BAS for the last two to four quarters
2. Personal and business bank statements for the last six months
3. Accountant’s letter or income declaration
4. Proof of ABN registration and business history (generally a minimum of two years)

Because the documentation is less comprehensive, lenders view these loans as higher risk. And because of that they often come with higher interest rates, stricter borrowing limits and a more conservative income assessment.

However, low-doc lending still works well, especially if you’re organised with your financial records, maintain a clean credit history and can provide evidence of ongoing cash flow. And it’s a great way to get your home loan across the line when documentation is otherwise challenging.

Practical tips to strengthen your application

If you have irregular or ABN-based income and are thinking about applying for a home loan, these actions can help you present a stronger application.

1. Work with a qualified accountant. An accountant’s letter or declaration can add credibility, especially if it can better explain the business model, income stability and expected future income.
2. Engage a mortgage broker that will work closely with your accountant. It’s important that your accountant and mortgage broker work closely together. This is the best way to prevent mismatched information and present your application in the most accurate and lender-friendly way. This collaboration can significantly improve your chances of approval and help avoid delays.
3. Keep clean, separate bank accounts. Keep your personal and business finances separate. Mixed accounts muddy the waters and make assessment harder.
4. Limit tax-deductible write-offs. Heavy deductions can reduce your taxable income. While this seems like a good thing, and can be in the moment, it can also weaken your assessed earning capacity. Lenders can often view a low taxable income unfavourably if it doesn’t reflect cash flow.
5. Work with a qualified accountant. An accountant’s letter or declaration can add credibility, especially if it explains the business model, income stability and expected future income.
6. Hold on to business records. Your business records, like profit and loss statements, balance sheets, BAS, invoices, contracts and client agreements can help show your business is legitimate and ongoing.
7. Consider a low-doc or specialist lender. If you don’t have two years of tax returns or lumpy revenue, find a lender who offers alternative documentation loans. Our team can help you find one that suits your needs and history.
8. Be conservative in your expectations. Lenders may average your income, use lower years and apply stricter serviceability tests. So be sure to keep your expectations in check, and build in a buffer (savings or a larger deposit) to improve your chances.

Preparation is key

If you’re a contractor, freelancer, sole trader or side-hustler, don’t assume that you’re shut out from borrowing. Lenders are more willing to consider non-traditional income, but they need evidence that it’s stable, sustainable and well-documented.

At Stapleton Finance we recognise that income and finances come in many forms. We’re also very happy to work directly with your accountant to make sure that your income and application is presented clearly and accurately, as well as lender friendly.

If you’re ready to turn your ABN or side hustle into home ownership, we’re here to help. Get in touch with our team today.

Ready to take the first step? Contact our team today!

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