What is a Self-Employed mortgage?
There is currently no specific mortgage product for self-employed people. In fact, the vast majority of mortgages available to the employed are also available to the self employed.
The main difference is that as a self-employed applicant, it will be more of a challenge to prove your income and satisfy the lender’s acceptance criteria, than it is for PAYE applicants.
How will your Self-Employed application be assessed
As with any mortgage, your application is assessed in terms of affordability and your personal financial circumstances.
For most lenders you will need to supply evidence of two years accounts, which have been signed off by a certified accountant. It’s also likely that there will be a minimum trading period of three years for your business.
The type of business that you operate can also have some impact on the assessment criteria used by the lender. It’s also worth bearing in mind that assessment criterias will vary slightly between lenders.
If you’re a sole trader, the lender will calculate your total available loan amount using your total net income. They will need a copy of your SA302 form for relevant years.
If you are a partner in your business how large your share is will affect the mortgage calculation. You need to own at least a 25% share, for your application to be considered. The figure will be calculated using your share of the net profits of the business.
If you operate as a limited company, only your personal income is usually considered, when calculating the loan amount. If you’re a Director however, some lenders may consider the business’ net profits in addition to your own income.
How much can you borrow?
How much you will borrow will depend on both the lender and as explained above, which type of business you apply as.
Like any other mortgage, your overall affordability to pay the monthly mortgage repayments and credit score will also have an effect on your loan amount. Having a high income becomes irrelevant if your current outgoings mean that the income is already accounted for.
What deposit will you need?
Whilst there’s not usually a minimum deposit criteria for self employed people, lenders are more cautious with self employed applicants. This means that having the highest deposit amount possible will always be beneficial.
It’s useful to know that mortgage rates usually decrease in steps when you’re able to offer 10%, 25% and 40%.
How do you improve your chances of being accepted by a lender?
We’ve already mentioned that offering the largest deposit available to you will help to secure a mortgage. There are also a few other things that will help:
Increase your income
Whilst this may sound obvious, it’s especially important to note if you own a business.
Good business practice often dictates prioritising retaining profits within the business. It’s wise to consider paying yourself a higher percentage as dividends, prior to your application to improve the appeal of your bank statements.
This not only gives you a more favourable income level, but allows you to save for a higher deposit.
Delay major business changes
If you are planning a business restructure, particularly a change of business type, for example sole trader to limited company, it would be sensible to delay this.
Lenders are more likely to approve those businesses with a stable history and recent changes could be a red flag.
It would be beneficial to get your accounts in order a good amount of time prior to your mortgage application. If it’s affordable, hiring an accountant would be preferable, as they would need to sign off your accounts prior to the application anyway.
You should also consider your credit rating as part of your financial planning. Looking at your credit file a year in advance gives you time to improve your score, through careful spending and prompt repayment.
How can a Mortgage Broker help?
Applying for your mortgage via a mortgage broker has a firm chance of improving your acceptance. A broker with specialist experience in self-employed mortgages will be particularly helpful.
Those experienced in assisting with self-employed mortgage applications will be able to look at your individual circumstances to anticipate any potential acceptance issues you may have. They are also able to suggest those mortgage lenders whose acceptance criteria most closely match your own situation.
In addition to this, they can also help you to find the best mortgage deals from the selection of lenders available to you.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.