What Income do Mortgage Companies look at if you are Self-Employed
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Self-Employed people often worry that getting a mortgage could be challenging. But if you have all your documents in order it should be plain sailing. Let’s look at how lenders assess your income and what you can do to get ready.
What counts as Self-Employed?
Mortgage lenders generally consider you as Self-Employed if you own more than 20% of a business that provides your main income.
Self-Employed borrowers can be Sole Traders, company directors or contractors. The way your company is set up can affect how you prove your income, as we’ll see later.
Why is proving income so important?
For any mortgage your annual income is crucial information, as it’s what most lenders use to work out how much to lend you. In general, you can usually borrow around four to five times your income.
This is important for Self-Employed mortgage applicants, as your income can vary year by year. That’s why a mortgage provider will often ask for a couple of years’ business details – it helps them understand your average income.
To prove your income, you often need to provide your financial accounts, your self assessment records, plus business and personal bank statements. Lenders will also look at your credit score to check for past debt issues.
Proving your income as a Sole Trader
As a Sole Trader – or a partnership – your business profits are your income; there’s no separation between your business and your personal finances. Lenders will usually look at your self-assessment SA302 forms to understand your earnings year by year, and may request up to three years’ details. You can access these from the HMRC website.
Proving your income as a Company Director
For a Limited Company you will need to provide certified accounts for the last one to three years, each stating your annual salary. You might also need to supply P60 forms or tax calculations.
An important consideration for Limited Companies is that each lender can have different ideas of what they accept as ‘income.’ Some will only accept your stated salary – which is often a low, nominal amount in a small business. Others will accept dividends too. Meanwhile some specialist lenders will also look at the net profit in your business to calculate your loan amount – which often means you can borrow a lot more.
Proving your income as a Contractor
While some lenders will treat contractors as limited companies or sole traders, others may have specific contractor assessment criteria. These lenders may calculate your income based on your day rate. This can often mean you can borrow more, as they are looking at your gross income rather than post-tax profits.
A contractor mortgage might have a minimum requirement for steady income – commonly two years. You will usually need to supply details of your current and previous contracts.
Do Self-Certified Mortgages still exist?
A decade or so ago, Self-Employed people would rely on Self-Certification mortgages to buy a home. These didn’t require any proof of income – the borrower simply just signed to confirm their annual earnings.
As part of a crackdown on lending after the credit crunch in 2008, the Financial Conduct Authority banned Self-Cert Mortgages. The main purpose of confirming income as part of the mortgage application is to ensure that people can afford to repay their loans.
How do I get a mortgage when Self-Employed?
The Self-Employed follow the same process to find a mortgage as everyone else. The first step is to find out how much you could borrow. Talk to a Mortgage Broker or use a mortgage calculator to set your property budget.
Next, obtain an Agreement in Principle from a Mortgage Lender. This is a statement of the amount they are prepared to loan you. An Agreement in Principle makes you a credible and appealing prospect to vendors when you make an offer on their property.
After your offer is accepted, you progress with the mortgage application and provide the documentation required. If you meet all the criteria, the mortgage should go through.
How do I improve my chances of my mortgage application being approved?
The secret to gaining mortgage approval is to make sure you meet all the lender’s criteria – which look at everything from credit ratings to property details. By choosing a professional Mortgage Broker like Easy Street you can leave all the research and recommendations to us. We’ll even help you apply for the mortgage and get all the documents together.
Easy Street Financial Services Limited is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Easy Street Financial Services Limited is registered in England and Wales. Call us today for a free initial consultation.
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