How do banks assess home loan applications for self-employed individuals?

If the application is working for a company, banks can assess salary income with pay slips or verify by contacting the employer. With self-employed applicants, it’s more difficult as there are no third parties to verify the income. Most lenders require self employed individuals to be in business for at least two to three years, because there are a lot of risks for starting a business, and from statistics 20% of businesses fail in their first year and around 60% of businesses go bust within their first three years. If you’ve been self-employed for less than one year there aren’t many options. So without third parties to verify income, lenders fall back on income tax returns, which they typically require for two years. They feel safe in relying on income tax data, because if there are errors in the reported income, generally it would be understating rather than overstating income. Of course, they don’t solely rely on the tax return because it doesn’t show how the business is performing. Banks also want to see an income statement for the period and balance sheet for the business. From the financial statements, they help lenders to understand the business cash flow and if the business is sustainable and making profits. If the business is set up with a family trust structure or there is a self-managed superfund involved, sometimes it can be challenging to understand how the money funnels through different entities. The assessment process can be complicated and banks would request for individual tax returns, business tax returns with business financial statements, plus the trust tax returns with trust financial statements. That would be a lot of paper works to verify, and often requires a more experienced manager to structure the loan application.