Loan Tip: Loan Serviceability when Employed by Family

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 9th Apr, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    We had a situation a while back where a bank discovered that a borrower was employed by a company owned by her brother. They did some investigations using the borrowers maiden name and uncovered this. It was a legitimate job with wage payments received for more than a year or more.

    The lender wanted the financials of the company as their considered her self-employed.

    The simple solution, in this situation, was to get the lender to ignore her income in full as it was not needed to service the loan, the loan serviced on the income of the husband only. They agreed to this and we lived happily ever after.


    When a borrower is employed by family or an entity owned by family members it is possible that you could be classed as being self-employed. This be aware of this and prepare.
     
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  2. dave80

    dave80 Well-Known Member

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    if she wasn't a director, shareholder or trust beneficiary, how did they determine her to be self employed?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    That is what I asked!

    Because it was her brother that was, a close and related party.
    This wouldn't be the case with every bank though.
     
  4. dave80

    dave80 Well-Known Member

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    there's more to the story - in commercial terms, a brother is not a close related party. was she receiving any form of profit sharing/distribution? i can't imagine any major institution making this assessment unless it is extremely marginal or the back story doesn't check out.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Nothing received other than wages. It was a major institution - a bank even.
     
  6. Lindsay_W

    Lindsay_W Well-Known Member

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    If applicant works for a relatives business, whether it's their brother, sister, Aunty, Uncle, Parents etc most lenders require minimum of two years payment history to confirm the income.
    Had this when applicant worked for his Uncle, they asked to see two years PAYG's to confirm income from that employer. Could be an issue if they have only been in the job for 18 months, for example.
     
  7. dave80

    dave80 Well-Known Member

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    ^^ that makes absolute sense, you want to ensure consistency of income and recent income hasn't been "jacked up" to satisfy loan assessment. requesting of financial statements and insight into an independent, arms length away third party is completely inappropriate.

    this feels like rogue (inexperienced) risk assessor rather than bank risk policy.
     
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I didn't push this because it was an easy fix to disregard her income altogether, but they are worried about income manipulation with related parties.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Loan round robins are not uncommon in many communities , which is why we ask for Tax rtns and NOAs where there is concern around that, and PAYG summary from any PAYG borrower every time

    ta

    rolf
     
  10. JohnPropChat

    JohnPropChat Well-Known Member

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    If she went through a payroll company instead of being directly hired, that may have fixed the problem?
     
  11. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    There are a few lenders that are a little more reasonable about this. Rather than ask for tax returns and business financials, they will just want to verify the business is profitable and the salary is not one of 'convenience'.

    In most cases this can be achieved through an accountant letter and a PAYG summary. You just need to know the right lenders to use.
     
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  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Here is some recent commentary from Macquarie about this topic

    I have a client who works for their partner’s business as PAYG. They are not a director or shareholder. Are we ok to just take the two most recent payslips and use current income? Both spouses are on the loan as applicants.

    No, we cannot. When an applicant works for their spousal partner, both applicants are parties to loan, and we require income from the spouse’s self-employed business, we will treat them as self-employed. To use the wages received, we will want to see the business financials and look at the income they received over the past 2 years.



    What if the client works for a family-owned business, and the spouse or family member is not an applicant?

    Assuming they are PAYG and not a shareholder or involved in the business, we can treat them as PAYG. We will require TWO of the three income verification options:

    1. Computer generated payslips as per standard policy

    2. Bank statements evidencing the most recent 6 months of salary credits

    3. The most recent individual tax return and ATO tax assessment notice
     
  13. Brady

    Brady Well-Known Member

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    Can echo that for CBA that if spousal business, they're not on the application all good to be verified via standard PAYG.
    This is one of those area's that privacy has actually helped in reducing questions asked/documents being able to be provided.

    They're not party to the loan, can't be asking for the financials.
     
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