Obtaining a mortgage when you’re self-employed
Whilst being self-employed offers numerous benefits, obtaining a mortgage when you're self-employed can prove problematic if not approached correctly.
The process can be more complex than if you're an individual working full time being paid a salary and taxed under PAYE. Understanding how lenders assess self-employed income is crucial for successfully obtaining mortgage funding. This article provides valuable insights to help self-employed individuals comprehend how their income will be evaluated by lenders, enabling them to navigate the application process smoothly.
Who does a lender regard as self-employed?
If you're obtaining a mortgage when self-employed, it is important to understand who lenders deem to be self-employed, as opposed to HMRC's definition of the self-employed.
A sole trader or partner is what most people consider to be self-employed and both HMRC and mortgage lenders share the same view.. However, if you're a company director, whilst HMRC might consider you to be an employee, for mortgage purposes, lenders consider you to be self-employed, typically where you have more than 25% of the ordinary share capital of a limited Company.
What do lenders regard as self-employed income?
If you're self-employed, your income can be varied based on how your business is structured. If you operate as a sole trader, for mortgage purposes your income will be typically based on the net profit generated by your business.
Conversely, if you are director if a limited company, your income may be regarded as a combination of salary and the dividends you draw from your company, Alternatively it can be based on your company plus your salary. However, in some even cases, it can be your company's pre-tax profit, plus your salary.
Having covered what lenders regarded as self-employed income, we'll now look at those factors that can help ensure the mortgage application process is as straight-forward as possible.
Income stability and future profitability
Lenders prioritise stability of income and profitability when assessing self-employed applicants. If you are able to providing a consistent income stream over time this effectively demonstrate a reliability in meeting mortgage repayments. Typically, lenders would prefer to see at least two, if not three years of self-employed income in order to assess income trends and business viability.
Financial records
In order to present your income accurately, you will need to provide essential financial documents, such as SA302 forms or final company accounts, covering the relevant period (typically two or three years). Additionally, you may need to provide tax year overviews from HMRC as evidence that your tax affairs are up to date.
These documents will highlight your business's performance and determine your eligibility for a mortgage. It may also be necessary to provide an accountant's certificate/reference to a lender, Typically, a lender will only accept these from a firm of qualified accountants who belong to a recognised professional body (e.g. ICAEW)
Proof of affordability
Apart from income assessment, lenders will also analyse your overall financial situation to ensure mortgage affordability. This includes evaluating your credit history, considering any outstanding debts, and regular expenses. Keeping a clean credit record and managing debts responsibly can positively impact your application.
Demonstrating Consistency
If you're a relative newcomer to self-employment and don't have the two or three years' income figures a number of lenders require as a minimum, securing a mortgage can still be possible, though somewhat more challenging. Some lenders might consider applications with only one year of income figures, but they possibly may need more information to give them a better understanding of income consistency and business prospects.
Summary
Navigating the process of obtaining a mortgage as a self-employed individual requires a thorough understanding of how lenders assess your income. By recognising the criteria used by lenders and the importance of income stability, you can be suitably prepared for the application process.
Gathering accurate financial documents and seeking advice from a professional mortgage broker who understands your circumstances will increase your chances of securing mortgage funding considerably.
We have teamed up with The Mortgage Squad, a firm of Mortgage Advisors who have significant experience in successfully placing mortgage applications for self-employed applicants.
If you are considering buying a property either to live in or as an investment or if you have a mortgage already and are keen to obtain a better rate or borrow extra funds, then please feel free to reach out to them. Their website is www.themortgagesquad.co.uk or you can contact them directly on 0330 0433204 or [email protected].
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And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.