What are Self-Employed Mortgages
What is a Self-Employed Mortgage?
There is no ‘Self-Employed Mortgage’ and actually, most standard mortgage products are available to Self-Employed applicants.
There is, however, a difference in the mortgage application process, with Self-Employed applicants often having to satisfy additional lender criteria compared to employed applicants. It can also be more difficult to prove your income than it is for those on employed salaries.
How will your Self-Employed application be assessed?
Your mortgage application is assessed predominantly in terms of affordability, you will also need to have a good credit history and be able to provide evidence of your earnings.
Most lenders will require at least two years of accounts (these will need to be certified by an accountant if you do your own taxes), as well as a tax return (SA302) in some cases. Lenders also sometimes have minimum trading period requirements for Self-Employed applicants of two years, on average. However it may be possible to obtain a mortgage with just one years accounts.
What type of business you operate will influence the amount and type of evidence you will need to supply, as per the below:
Lenders use an average of your declared total net income for a period of two to three years in order to establish an amount to base your loan calculation on. You will need to provide copies of your SA302 forms for those years. Some lenders will take an average whereas others may utilise most recent year if the figures are increasing year on year.
As a partner, the size of your share will determine whether you can be classed as Self-Employed for mortgage application purposes. Providing you own at least a 25% share, your application will be considered, using your share of the net business profits to calculate the loan amount. This will then be assessed as above, usually on an average on the last two or three years figures.
Those operating as a limited company should be aware that only personal income is usually taken into consideration for the purposes of the loan calculation. Directors may sometimes submit the business’ net profits in addition to this, however, only specialist lenders will be willing to consider this. Lenders when assessing a limited company director or shareholder of over 25% would often utilise the Salary and Dividend payments as per their last 2 or 3 years tax returns. However some lenders can also consider the applicants share of retained net profit in the business.
How much can you Borrow
Being Self-Employed will not impact how much you’re able to borrow in any other way than how much of your income will be considered by the lender. The loan amount will be based predominantly on your total income amount and affordability and your credit rating.
Ordinarily, a multiple of four and half times your income will be used, although this can vary massively from lender to lender depending on a few factors. Some professions, especially those with higher incomes, can borrow higher multiples of their calculated income. Your credit score can also both positively or negatively affect what multiple of your income the lender is willing to use for their calculation, alongside the size of deposit and Loan to Value ratio.
What deposit will you need?
Lenders tend to be slightly more cautious with applications from Self-Employed lenders and therefore it will benefit you to offer the highest deposit you can comfortably afford.
Whilst there is no minimum deposit requirement for Self-Employed applicants, a minimum of 10% deposit is usually expected from any applicant. If you are able to offer more, it’s useful to know that lenders generally decrease their mortgage interest rates in steps when 10%, 15%, 25% and 40% are offered.
How do you improve your chances of being accepted by a Lender?
Increase your income
Whilst prioritising retaining profits within the business is often standard practice, taking a higher percentage of dividends for a period of time prior to your application, may improve your chances.
As well as increasing your overall usable income, it may give you the chance to save a higher deposit, which can also improve your chance of acceptance.
Delay major business changes
Lenders prefer stable businesses, so if you are planning a restructure, it would be best to delay this until after your mortgage application.
Ensuring all of your accounts are up to date and signed off by a certified accountant and all tax returns submitted prior to your mortgage application is likely to improve your chances of acceptance. As well as giving a more professional appearance, it will save you time and preparation in the long run.
Taking steps to improve your credit rating as in advance of your mortgage application can also help avoid the disappointment of being refused for a low credit score. Your score can easily be improved through careful spending, staying within existing credit limits and prompt repayment of your accounts.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
How can Mortgage Brokers like Yellow Brick Mortgages help?
As specialists with experience in advising Self-Employed mortgage applicants we will anticipate any potential acceptance issues you may have. This allows us to direct you to lenders whose acceptance criteria most closely matches your circumstances. We have access to a range of specialist mortgage lenders, who can often offer more competitive deals than high street lenders.
Applying for a mortgage can be time-consuming, especially for business owners. Another benefit of using Yellow Brick Mortgages is that we can reduce the administrative burden of your mortgage application, saving you both time and stress throughout the process.