Exploring Mortgage Options for the Self-Employed
Being self-employed and navigating the world of mortgages can often feel like a daunting task. The traditional route to securing a mortgage if you're employed isn't the same as when you're self-employed, where everyone has a unique financial situation by running your own business. We will walk you through the essential steps and strategies to help you successfully secure a mortgage as a self-employed individual.
Understanding Your Financial Situation
Mortgage Lenders typically require a two-year trading history, although there are a few lenders that will consider you if you have one year, to qualify.
It is crucial to have a firm grasp on your financial situation. As a self-employed individual, your income may not follow the standard structure of a salaried employee. Lenders will typically scrutinize your financial records by reviewing business bank statements for the last three months to verify that your income is sustainable.
Organizing Your Financial Documents
Gather all relevant financial documents. If you are a sole trader, you will need your Tax Returns (SA302's) for the past two years including the corresponding Tax Overviews, if you trade under a Limited company you'll need the same documents but may also need the company year-end accounts for the past two years. These will provide lenders with a clear picture of your financial health and stability.
Calculating Your Income
Self-employed individuals often face challenges in proving a consistent income. Utilize your tax returns and financial records to calculate your average income over the past few years. This figure will be crucial in determining the loan amount you can afford.
If you own over 20/25% of a Limited company, mortgage lenders will consider you to be self-employed and ask for tax returns/company accounts as proof of income. If you own under 20/25%, they will consider you employed and request payslips.
For Sole Traders, mortgage lenders use the average of the past two years Net Profit from your Tax Returns to calculate your income. There is a small amount of lenders that will only use the latest Tax Return Net Profit figure.
If you have a Limited company, dividends and the director’s salary showing on the SA302s is used - again, the average of the past two years or sometimes the latest years figure can be used.
Some lenders can use the net profit showing on the company accounts, either before or after tax plus dividends and/or salary.
Strengthening Your Mortgage Application
Lenders like to see consistency, so if the figures differ on your tax returns from one year to another, the lenders will ask why.
Self-Employed-Friendly Lenders
It is important to pick the right lender as you may only have one good trading year and it’s important to go to a lender that you can get the most loan from, if needed. Depending on your company set up and if you leave profit in the company or take it as dividends, you have to get the lender right as they all have a variation of what they accept. A mortgage advisor can help with finding the right lender for you.
Consideration of Alternative Documentation
In some instances, lenders may accept alternative documentation such as an accountant’s reference letter.
Conclusion
All lenders have varying criteria, what one will accept, the other won’t. Securing a mortgage as a self-employed individual may present challenges, but with planning and preparation, it is doable and won’t cause any issues.
By understanding your financial situation and exploring tailored mortgage options, you can enhance your chances of successfully obtaining a mortgage that you need.
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