Loan Affordability - not as simple as you'd think

27 June 2014

For most people, providing confirmation of household income when applying for a home loan is as simple as supplying a few recent payslips which confirm regular hours and rate of pay or an annual salary figure. But with lenders assessing applications with affordability as a major driving factor, there are many occasions when proof of the income stated on the application is not quite as straight forward.

We recently had a situation where a client was employed working 40 hours per week with part of the payment on a basic rate and the balance at time and a half. Unfortunately, the pay details provided showed that the regular hours worked were lower than the amount calculated based on his actual income, due to this unique pay arrangement. Consequently, we had to provide additional background to the lender to give them confidence that the income figures stated were accurate and provided the client with adequate funds to cover the new mortgage.

One of the situations that provide the biggest challenge when trying to confirm income is when the client is self-employed. New Zealand has around 10% of the workforce in self-employment with many more working on a contractual basis. Dependent on the type of employment, income may be derived on a regular basis through a number of sources, or could be from one type of income (such as painting or building) but irregular in frequency or level of payment. In that type of situation, the easiest way to prove income is from end of year financial statements prepared by an accountant, which will show income and expenses for the business. Unfortunately, for many business owners, the figures which have been calculated have been worked out with a view to minimising tax payments, but this has the detrimental effect of showing that the income derived is a lower amount than required to service the debt applied for. We have in the past had to provide GST statements, invoice books and supporting letters from companies being worked with, just to show that the income to repay the debt is actually coming in.

Of course, there are some self employed clients who due to their busy schedules don’t get to file their end of year reports, and unfortunately, most lenders will find it difficult to approve a loan application if the last available income figures are too old. That is why it is important for all self-employed clients who may be considering purchasing property in the near future, to make sure that they have had their financial reports completed. If that is not possible for some reason then all may not be lost. As long as the applicant has at least 35% equity to go towards their purchase they may be able to complete a Lo-doc application. This is a product available for self-employed clients who are unable to substantiate their income, who can show from their statements and a signed declaration that the income being generated provides sufficient personal income to service their borrowing.

Fortunately for most people, the proof of household income is a relatively straight forward process, but bear in mind that there are often other income streams which may or may not be acceptable to lenders when putting figures through their own affordability calculators. Knowing which lenders will accept these different income sources and what documentation will be required is not always as straight forward and is a good reason to seek the services of your local registered home loan and insurance adviser.

 

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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