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Getting a Self-Employed Mortgage

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How to make obtaining a Self-employed Mortgage easier

If you’re self-employed, then successfully meeting all the criteria laid down by mortgage lenders might seem like an uphill struggle, especially since the introduction of more stringent lending policies following the financial crisis of 2008–9. People in traditional employment can prove their income by simply showing payslips and bank statements from the last 3 to 12 months, but freelancers, contractors and other self-employed people aren’t in the same position to show a regular and ongoing income.

This said, many mortgage lenders have woken up to the fact that their lending policies need to be more flexible to meet the growing demand and requirements of an increasing sector of the population who are opting for self-employment, and it is entirely possible for a self-employed person to get the mortgage they need. Below, we’ll go into some of the methods you can use to make it easier to get a self-employed mortgage

What lenders want to see when you apply for a Mortgage

  • Full business accounts – While most mainstream lenders will insist on business accounts from at least the last three years, there are many specialist mortgage lenders in the market with more experience and understanding of self-employed businesses who will only ask for one year’s worth of accounts.
  • An accountant – Across the board, all mortgage lenders will want to see that a chartered or certified accountant has certified your business accounts are correct.
  • SA302 forms – If you have submitted your tax return to HMRC via self-assessment, then many mortgage lenders will want to see your SA302 end-of-year tax calculation forms, either in addition to or instead of your full business accounts. Depending on the lender, this could be for the last one, two or three years, or sometimes more.
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  • Consistency – If you’re not in regular employment, a key thing any mortgage lender will want to see is stability or an increase in your income over a reasonable period of time. If there are regular or prolonged gaps in your income stream visible in your accounts, then this may affect a lender’s decision. If you can provide a good reason for any lapses in income, such as maternity leave or a period for surgery or ill-health, then this should satisfy the lender, but do be prepared to answer honestly all and any questions relating to your income.
  • A good credit history – Just the same as with any other mortgage application, adverse credit events in your financial records could jeopardise your ability to get a mortgage.

Getting a Self-Employed Mortgage tips

Additional factors for Limited Company Applications

There are a few other things you will need to bear in mind to prove to a lender you can afford a mortgage if you run your self-employed business as a limited company. Remember that mortgage lenders each have their own sets of criteria when assessing a mortgage application, and many have differing policies when it comes to considering things such as dividends and retained profits when looking at your income and affordability.

Discuss your mortgage requirements with your accountant

It could be worth your while to restructure your payments from your company to show a greater ability to maintain mortgage payments. Many limited company owners deliberately minimise their drawings from their business in order to keep income tax as low as possible, but a lender may view this a lack of ability to afford a mortgage.

Use a mortgage broker

A specialist broker with in-depth experience of the mortgage market and the products available for the self-employed will know which lenders offer the best deals, what their application criteria and requirements are, and whether they consider dividends and retained profits when assessing affordability. This can be invaluable to sole traders and actually vital to limited company owners.

Consider private banks

Private banks will often be the most flexible when it comes to affordability and the amount you will be able to borrow, and could be the best option for high-net-worth individuals looking to borrow a larger amount (usually over £500,000). They offer decent mortgage terms and understand about taking into account multiple income streams and the value of business or personal assets.

How an accountant can increase your chances of getting a Self-Employed Mortgage

After the financial crisis of 2008–9, and the imposition of stricter rules for borrowing and lending, people of any employment status have had a trickier time of getting a mortgage. Since self-certification mortgages were removed, the self-employed in particular have had even more hoops to jump through.

You might be considering three main things when looking into a mortgage deal: your financial circumstances (income, expenditures and credit rating); getting advice from the right mortgage broker; and getting the best possible deal from the right lender. However, there is a fourth factor that a self-employed person should consider when applying for a mortgage: seeking advice and help from an accountant.

Most mortgage lenders will ask you for a raft of financial information to prove your income as a self-employed person, freelancer or contractor–in particular your business accounts from the last one to three years, certified by a chartered or certified accountant. Presenting these figures to the lender in the best possible light can make a huge difference to the amount you could be able to borrow.

Your business set-up

The way your business is set up can affect the way lenders will look at your application. A sole trader’s profits are seen entirely as income, and the SA302 form sent by HMRC will show your income received and tax due for any given financial year. A partner in a company will need to show each partner’s share of the profits, and your accounts will need to clearly and easily show the lender your own personal annual income.

Someone operating their business as a limited company and taking a small salary plus dividends is keeping their business and personal finances separate, and will need to ensure lenders take both into account when applying for a mortgage.

How much can you borrow?

Lenders base their mortgage offers and the amount you are able to borrow on an applicant’s credit score and verifiable income. Self-employed people are all too aware that income can come from a variety of sources and of course may fluctuate.

A poor year in your accounts is likely to have an adverse effect on the amount of money a mortgage lender is willing to offer, or on what terms. If you had a poor year most recently after a decent previous two, then a lender may only take the most recent year into account, or give it more weight, thus reducing your borrowing ability. Similarly, if you’ve just had your best year and your business is growing after a tough first few years, a lender taking three years of accounts into consideration will use the average across that period, and the amount they are willing to lend could be reduced.

Good Practice

An accountant will be able to advise you where you may face issues in your accounting, but a good start is to keep your business and personal accounts and spending entirely separate. If you often make business payments on a personal card, and then pay the balance from a business account every month, then mortgage lenders could see this as a high level of personal spending, which may adversely affect your ability to borrow. If you don’t already have separate business and personal bank accounts, then set them up and keep them operating sensibly. And remember that a check will be run on your business address as well as your personal details, so make sure all payments are up-to-date with both.

The more years’ accounts you have dating back over the course of your business the better. What seems like a chore could in fact make your life a lot easier when it comes to arranging a mortgage, or any other form of borrowing. There are numerous things to consider when looking into a mortgage, but working with your accountant to get your finances in order is one of the key things that can make a difference to your borrowing ability.

Steps to get a Mortgage on a Fixed-Term Contract

  1. Use a self-employed mortgage specialist –Talking to a specialist mortgage broker and lender will immediately free you up from the limited range of knowledge and products available within mainstream lenders and banks. Put simply, the staff at their call centres or branches will not be able to give you the best advice as they will not have access to all the facts, nor know the right questions to ask to process your application. When looking for a self-employed or contractor mortgage, a mortgage broker who specialises in helping niche-market borrowers will know what information they need from you to get you through the application process and save you a huge amount of time and stress.
  2. Keep your credit rating clean – It’s essential as a self-employed person that you do everything you can to ensure your credit rating remains strong. Even if you can verify a good, regular income and can put forward a decent-sized deposit, many lenders will hesitate to lend to a self-employed person with a poor credit rating. Simply making sure you are on the electoral role and that all the details about you held by the three main credit agencies are correct can make a difference.
  3. Have a decent deposit – You can still find a mortgage with a five percent deposit, but the larger the sum you are able to offer, then the greater your chances of being able to obtain a mortgage to suit your requirements, and at a reasonable rate of interest.
  4. Have an up-to-date copy of your contract – Proof of ongoing work will also strengthen your application in the eyes of a mortgage adviser. Make sure you can get a signed, up-to-date copy of your contract, that accurately shows the length of the contract and your rate, to support your mortgage application.
  5. Be realistic – It’s always best policy to be honest with yourself about what you will be able to afford with your mortgage. Your current contract might be for £300 a day, but will you still be on the same rate when you move on top your next job, or will the next job even be guaranteed? Mortgage interest rates are likely to go up after an all-time low, so self-employed people should factor this into their calculations as well. Make sure you’re not putting yourself in financial hot water.

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