Self-employed in Mortgage terms can be a broad definition which is used to describe Sole Traders, Partnerships, Limited Company Directors and some Contractors.
For Sole traders and Partners, their share of Net Profits will be used to calculate how much they can borrow. Net profit is a person’s income, before they have paid tax on them but after their expenses have been taken away.
What evidence lenders will require
Most lenders will require you to have 2-3 years’ worth of Accounts. And will request the following evidence:
- Up to 3 Years HMRC SA302 Tax Calculations or Accountants Version.
- And up to 3 years corresponding HMRC Tax Year Overviews.
- Bank Statements showing Income and Outgoings.
- On occasion an Accountants Certificate/Reference or Projection may be required.
- On occasion for Limited Companies: Full set of Company accounts may be required.
Common reasons Self Employed struggle to obtain a Mortgage
The following are the most common reasons applicants struggle to obtain a Mortgage when going direct to lenders.
- Less than 2 years’ worth of self-employed accounts
- Lenders using an average of the last 2-3 years’ worth of figures or latest figures if lower
- Decline in net profit over the last 2-3 years or a loss in the latest year
- Applicants declaring, they earn up to or less than their Personal Tax-free allowance
However, there are options for the above and a Specialist Mortgage Advisor should always be sought to guide you through the process.
1 years’ worth of self-employed accounts or Latest years figures for Affordability
The following are the options available to Applicants who only have 1 years’ worth of Self-Employed figures or need to use latest years figures for affordability purposes:
- 1 years’ worth of self-employed figures – over a dozen specialist lenders would be prepared to lend and a couple of mainstream lenders. You should be able to go up to 95% loan to value with a couple of lenders. However, most will require a 15% deposit.
- Latest years figures for affordability purposes – this could make a huge difference to what you are able to borrow. As most lenders will take an overage over the last 2-3 years. Over a dozen specialist lenders would be prepared to lend on this basis and over half a dozen mainstream lenders. You should be able to go up to 95% loan to value.
Limited Company Directors
Most lenders will deem a Director to be Self employed when they own 25% or more of a Limited Company. If the share they own is less than this, the applicant may be able to use payslips for affordability as lenders may deem them as employed.
Most of the time the applicants share of Salary and Dividends will be used. However, some lenders will consider the applicants share of net profits, which often makes a big difference to what the applicant is able to borrow.
Again, there are lenders who will accept one years’ worth of accounts or latest years figures if you have been trading for more than 1 year.
We have a whole section dedicated to Contractors, as this is actually its own Specialist area. Particularly when you are a Contractor which works in IT or the Construction industry, as not every lender will consider you to be self-employed. The benefit of this is usually massive when it comes to the amount you can borrow. So, even if you have set up your own Limited Company. If you are in one of the above industry’s or get paid a daily rate and have a contract confirming this. Be sure to check out our dedicated Contractor section.
This is where Lenders allowed Applicants to essentially declare what they earned without providing evidence to back it up. The obvious risks that came with this, were applicants being able to state they earned more than they actually did enabling them to borrow amounts that were potentially unaffordable. Following the Financial Crisis this lending practice was banned in the UK by the Financial Conduct Authority (FCA).
However, a loophole allows companies outside of the UK to sell these types of Mortgages to UK consumers. And some companies have taken advantage of this. Funding becomes available intermittently and when it does, they usually sell their quota fast.
However, the FCA has issued a warning as these companies are not regulated so you have extremely limited protection if anything goes wrong. This is because they don’t have to follow the guidelines or rules set by the FCA.
Simply have a question or need to get moving. Next steps?
Not all Mortgage Advisors will have the specialist knowledge to deal with Self-employed Mortgages. Speak to one of our qualified, regulated and highly rated Mortgage Advisors.
Simply complete our short Mortgage Enquiry form and we will get one Mortgage Advisor that is local to you and which specialises in your case, to give you a call. They can answer any other questions you have, provide you with a free non-obligatory quote and/or talk you through the process in greater detail.
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