Self-Employed and Getting a Home Loan - 7 Secrets
Buying a home and securing a private home loan in Singapore when you’re self-employed is a little more complicated than if you’re employed. However, the process can still be smoother with the help of a qualified home loan mortgage broker, as well as a bit of preparation.
Here are some secrets on how the self-employed can get their home loans approved.
1. Understand how the variable income haircut affects your TDSR
Examples of variable income sources include:
- Income purely from commissions
- Income derived from a business that you own
- Rental income
- Income from stock dividends
- Income from the gig economy / contract work,
When you have a variable source of income, the bank will apply a haircut on your median income. In other words, you will be considered as earning 30 percent less than you actually do. For example, if your income is $6,000 per month, you will only count as earning $4,200 per month.
This will affect your Total Debt Servicing Ratio (TDSR) limit. Under the TDSR, your total monthly loan repayments (inclusive of your home loan) cannot exceed 60 percent of your monthly income. As such, a variable income also means a lower TDSR limit.
The most straightforward way to manage this is to take a longer loan tenure (which will reduce monthly repayments), or make a bigger down payment. You should also aggressively pay down any loans, such as car loans or credit card loans, before making a home loan application.
2. Don’t under-declare your income
If you are self-employed, you will often be required to show documentary evidence such as payslips, paid invoices, or commissions received. The more useful pieces of paperwork, however, are your Inland Revenue Authority of Singapore (IRAS) tax returns, and your Central Provident Fund (CPF) statements.
While banks have different standards on what they’ll accept, almost all of them will acknowledge your IRAS tax returns or CPF. This means that, if you are upfront about your earnings and pay your taxes and your mandatory Medisave contributions right, it will be much easier to get your loan approved.
(You also won’t run the risk of getting into trouble. You don’t want IRAS to come knocking if you declare an income of $3,000 per month to the government but an income of $10,000 per month to a bank.)
3. Keep proper records
Make sure you keep proper records of your work and projects, or else a bank can’t assess your real income. If you run a business, for example, it may be a good idea to start using some form of accounting software or to hire an accountant part-time if you can afford it. Most banks will not accept “personal systems” that don’t meet accounting standards.
You should also ensure your CPF statements, IRAS tax returns, and at least three months of your payslips are all prepared and ready when the bank asks for them. Alternatively, you can get a mortgage consultant in Singapore to help you sort it out (see below).
4. Don’t rack up a bad credit score, and fix it if you have one
Having a 30 per cent haircut applied to your income is bad enough; don’t make it worse by also getting a bad credit score. Even a single warning letter can downgrade your credit score, thus lowering the amount you can borrow.
Take special note of this if you are running a sole proprietorship and are heavily leveraged due to your business. It’s best to start reliably paying back your loans, and closing unused credit lines, at least 12 months before attempting to take a private home loan in Singapore. Your credit score will start to improve with consistent repayments and reduced debts.
If you have ever registered yourself as a director or a secretary of someone else’s company, be sure to check whether it’s affecting of your credit score. There are cases of people listing themselves as directors of a relative or friend’s company, and then seeing their credit score drop because of said company’s debts.
You can obtain a copy of your credit report from the Credit Bureau of Singapore for $6.42.
5. Time your home loan application—don’t do it right after you become self-employed
If you are currently employed but are about to leave and start your own business, be sure to make your home application while you’re still an employee.
Most banks cannot assess your income within the first year of becoming self-employed (for some banks, they require two years of your income). Remember that a new business owner files tax returns on the following year; there’s no way the bank can assess your income until then.
6. Provide collateral to raise your effective income level
Common forms of collateral include a fixed deposit with the bank, other properties that you own, and a stock portfolio. If you can provide sufficient collateral, the bank will treat your income as being higher than the assessable amount.
However, each bank has different policies on what sort of collateral they’ll accept, and how they value the collateral. You may need to approach a different range of banks to get the best deal.
7. Consult a home loans specialist to help
A home loan mortgage broker is a specialist that can help with the crucial paperwork to obtain a housing loan in Singapore. For example, a home loan specialist can show you which documents to prepare—and how to prepare them—if you run multiple businesses or are reliant on large but infrequent commissions.
A home loan mortgage broker can also approach multiple banks on your behalf. This saves you the effort of having to call banks one at a time and trying to bargain for your loan approval.
These specialists also help you out for free as they are effectively paid by the banks, so there’s no reason to inconvenience yourself by not using one.
Get your house in order
Being self-employed doesn’t need to be a hindrance to buying your own home. The key is to make sure you prepare all the relevant paperwork and keep your finances in good shape. By running your business efficiently and fulfilling your obligations as a taxpayer, you can increase your chances of finding the best housing loan you can get.
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