24 Sep 2018
Are you self-employed and worried about whether you'll be able to get a mortgage?
We've put together this handy guide to help you understand what lenders will look for from business owners looking to apply.
An independent mortgage adviser is invaluable when you are self-employed. They know what income the lenders will accept and importantly how they will look to verify it at a later stage.
They also know which lenders are more flexible in their approach to underwriting and perhaps be prepared to lend to someone self-employed with only one years’ accounts plus a projection for example.
Finally, an independent mortgage adviser will ensure you the best possible deal from the whole market.
Be sure to check your credit history as lenders are likely to look for a squeaky clean credit record. Best to check via credit referencing agency like Experian, Equifax or Call Credit as those are the ones lenders typically use to base your credit worthiness on. Some credit agencies provide this to you free of charge, some will also contain all three credit agency reports on the one application.
Lenders typically don’t like any adverse credit entries against you, especially more recent entries but again if in doubt, speak to an independent mortgage adviser who will help you further.
Minimise your credit checks before you come to apply for a mortgage, as multiple credit checks in a short space of time reduce your overall credit score. Be aware if using comparison sites for insurance for example that they will run multiple checks at the same time.
Check with your local council that you are on the voters roll as this helps your credit score as lenders like to see you located at a fixed abode.
The bigger the deposit, the lower the rate and sometimes the more flexible approach to underwriting as this lowers the risk to the lender. Typically the minimum deposit is 5% but the lowest rates tend to be where you put down a 25% deposit.
This confirms the maximum a lender will lend to you giving you peace of mind that you are looking at properties within your budget. It is also a good indicator that your credit history is in good order.
When looking for an Agreement in Principle it is best to bring your accounts to your mortgage adviser at the same time as they will know best what income can and will be used by your mortgage lender as evidence of income when you come to fully apply after you have found your property.
If you don’t have 2 years accounts/SA302’s, don’t panic as some lenders will consider your application if you can prove a track record of regular work e.g. you have left an employed salaried position to work as a contractor in the same industry/set up your own limited company or you can provide evidence of work lined up in future. Some also lend based on at least one years figures plus a projection for year two.
Importantly, when you employ an accountant however, they must have chartered or certified status.
The lender will typically base what you can borrow against your net profit figure, usually an average of the last 2 years.
If you do your own tax by self assessment and get HMRC to calculate it for you, you will receive a form called an SA302 and tax calculations overview documents that show your income received and total tax due. Most lenders accept these documents instead of accounts.
Lenders normally take into account each of the partners share of the net profit, so make sure you have accounts to show how much you made so your potential lender can easily see your annual income.
Lenders will normally take into account the Directors basic salary plus their dividend payments, again this can be proved via accounts/SA302’s.
Some lenders don’t accept dividend payments as evidence of income however, will consider retained profits preferring to take a look at the performance of the business overall instead.
Some lenders may be willing to calculate your annual income on the basis of your day rate, though may require you to have a 12 month contract for this to be an option. Lenders usually assume you work somewhere between 46 and 48 weeks of the year and therefore multiply your day rate by the number of days per week you work then by 46/48 weeks.
This approach can be especially helpful if you have only recently left full-time employment and do not have an established track record. In this situation, lenders will want to see evidence that you’re likely to succeed as a contractor, including previous experience and qualifications in your field, signed agreements and an existing network.
Be prepared for lenders to ask for up to 3 months personal bank statements and sometimes up to 6 months business bank statements/invoices too.
If you have suffered from a DIP in income, be prepared to give explanations as to why this has happened. Lenders will be more prepared to lend if they consider your explanations to be reasoned and reasonable.
As you can see it's definitely not impossible for people who are self-employed to get a mortgage.
Hopefully this should clear up any doubts or questions that you had regarding applying for a mortgage as self-employed, but if there's anything you feel we missed or you would like to chat with one of our independent mortgage advisers about then take advantage of our free mortgage advice appointments.