14 May 2015 8 steps to get your finances in order Preparation is key to helping you achieve a successful home loan application. Here are 8 ways to help you be better prepared, which may place you in a stronger borrowing position when it comes to applying for a home loan. 1. Know your business It’s important to know your key financial figures, including your current income, net profit, expenditure and future projections. If you’re not confident answering these questions, it’s a good idea to speak to your accountant who can help you answer them. 2. Check your credit file history Run a credit file report on your personal and business credit file history. If there have been issues in the past, it’s a good idea to check your credit file and try and rectify the situation prior to applying for a home loan. Sometimes your credit file may have errors such as defaults, court writs or judgments listed by mistake. It’s also a good time to check for other things that may affect your rating such as frequent changes of address, overdue accounts and too many credit applications. 3. Work out your Loan to Value Ratio (LVR) The LVR is your loan amount shown as a percentage of the market value of the property you want to buy. The percentage that lenders are willing to accept will vary. You can decrease your LVR by reducing your loan amount or by having a bigger deposit. 4. Keep track of cash flow Lenders will look at your personal and business cash flow to analyse your ability to make loan repayments. Here are some ways in which you can improve cash flow: Chase up as many outstanding payments as you can. Review your expenses. Figure out where you can reduce your costs. Look at your current debt and see if you can combine it in a low interest and low fee product so you’re paying less interest. 5. Establish a personal budget Think about what you are currently spending your money on so you can work out how much you can afford to pay each month towards a home loan. For example: Basic essential living costs – food, transport and school fees Current debt commitments – other loan and credit card repayments Lifestyle – leisure and entertainment Other – such as eating out, childcare and costs such as investment properties 6. Work out your deposit Your chances of buying a home will improve if you have a decent deposit. To avoid paying Lender’s Mortgage Insurance (LMI) you should aim to save at least 20% of your property value. You will also need to have additional funds to cover transaction costs and establishment costs. 7. Understand your tax returns To confirm your income and qualify for a self-employed home loan, many lenders will often require two years’ Personal Income Tax Returns and two years’ Business Income Tax Returns. An Australian Tax Office (ATO) lodgement reference number may be required to accompany Business Activity Statements. Having your tax returns up-to-date will help speed up the loan application process. If you are unable to provide this documentation, some lenders may accept a signed Borrower Certificate of Income Declaration Form from your accountant. 8. Collate supporting documentation It’s good to get together some of the supporting documentation you may need prior to your appointment to support your loan application. Business Activity Statements (BAS) One type of appropriate documentation is 12 months’ of BAS. These are a way for businesses (and borrowers) to report their GST and PAYG withholding tax obligations and are often used by lenders to assess a customer’s borrowing capacity. Borrower Certificate of Income Declaration This is a form stating your personal details and net business income less expenses per annum before tax. It is then signed by your accountant who declares, that based on their knowledge, it is not an unreasonable estimate of your annual income less expenses (before tax) and is in line with previous financial years’ income levels. If you can supply full financial statements If you are able to supply additional financial documentation to the above, the lender may be able to offer you a standard home loan with a higher LVR. Your home loan expert can explain what additional information you may need to supply.