Entering into a mortgage as a self employed / sole trader can be an uncertain time.
Can I get a mortgage if I’m self employed? Is it harder to get a mortgage? Can I borrow as much if I don’t earn the same every month?
These are some of the burning questions you may have if you are self employed and need a mortgage to buy your first home or if you have recently become self employed and are not sure how it will affect your existing borrowing.
Thankfully, we have the answers and we are here to help you.
Let’s start with:
Can I get a mortgage? – the short answer is yes, you can. Provided you meet the required criteria – more about that below.
Is it harder to get a mortgage? – not necessarily. If you meet the criteria, it doesn’t matter if you are employed or self employed.
Can I borrow as much if I don’t earn the same every month? – yes, the amount you can borrow is based on the annual income you declare to HMRC on your Tax Return.
So what is this criteria?
Well, the criteria differ slightly from lender to lender but has many similarities and essentially acts as a guide to whether or not an applicant can be considered.
It deals with everything from Acceptable properties and Affordability through to Valuation fees and includes what types of income are acceptable, what proof is required, acceptable ID, properties of non-standard construction, accepting a deposit gifted by relatives, acceptable levels of poor credit and many other factors. Only a small portion of the criteria will apply to any given application and the information is not easily accessible to members of the public.
In order to check the suitability of an application against a lenders mortgage criteria an applicant can either try calling the lender in question or turn to a broker who can conduct the necessary research.
The criteria apply to all applicants both employed and self employed but different parts apply with regards to assessing affordability and providing proof of income.
The biggest hurdle faced as a self employed person seeking a mortgage is the number of years trading history.
One or two lenders can consider an application from a sole trader with 1 full year of accounts but many need to see an average of 2 or 3 years trading history.
If you have only just started, you may find it difficult to find a competitive lender able to help.
If the declared income is going down, lenders are more likely to look at the most recent year to calculate if a mortgage is affordable however if the income is in serious decline, a mortgage may not be possible. – If in doubt, get your figures reviewed by an experienced adviser.
Income figures are obtained by preparing accounts to determine a net profit figure for the previous tax year.
Evidence of income can be a certificate or letter from an accountant (usually certified or chartered) or by providing SA302s from HMRC which, show the annual income (profit) figure from the accounts.
SA302s can be requested directly from HMRC, your accountant can request them for you or some lenders can accept copies printed from the HMRC website.
The amount a self employed person can borrow is determined by the annual income figure declared to HMRC.
Lenders do not tend to use income multiples anymore in favour of a more complex affordability calculation which, takes into account average annual income against other financial commitments (loans & credit cards) as well as number of children and other dependents and typical household expenditure.
Average income is calculated by adding 2 or 3 years’ income together and dividing that by 2 or 3 (depending on the number of years used).
E.g. (for an average of 2 years)
Annual income for 2013 – 2014 = £22,000
Annual income for 2014 – 2015 = £23,500
Average income is £22,000 + £23,500 = £45,500 / 2 = £22,750
The easiest way to determine if a mortgage is affordable is by visiting the website of the proposed ender and using their ‘Affordability Calculator’. Most lenders now have them online and they are pretty straightforward.
To conclude, the main differences faced by self employed mortgage applicants compared to employed applicants are:
1/ Length of time as self employed – typically 1 year or more is required.
2/ Proof of income – accountants certificate or letter or SA302s
3/ Average income over 2 – 3 years in some cases to determine affordability.
If you are self employed and are facing uncertainty, get in touch and we can help you assess your situation to determine how much you could potentially borrow. We can help find a suitable lender and guide you through the application process.