If you’re self-employed and looking to take out a mortgage, you may find that the process can be a little more complicated than it is for those with a traditional salary. Banks can be overly cautious when it comes to lending to self-employed workers because of the risks associated with having a volatile income. But don’t worry, there are still ways to get a mortgage when you’re self-employed.
When it comes to calculating self-employed income, most lenders will ask for at least two years’ worth of accounts in order to consider your application. This includes the last two or three years of accounts plus three months of bank statements. You can supply your business accounts yourself or get a reference prepared by a qualified accountant. If you file a self-assessment tax return, lenders will look at the profits you make and may require additional evidence such as upcoming contracts or clients to prove that you will continue to earn similar sums in the future.
When calculating your income, lenders will also take into consideration your employment status. If you’re a partner in a business, then you’re likely to be treated in a similar way to self-employed borrowers, except that lenders will look at your share of the net profit when calculating what to lend to you. If you’re a limited company director, your income may be irregular and made up of a combination of salary that you pay yourself and dividends, and lenders will take both components into consideration. You will need to provide at least two years of company accounts.
For those who have a real blend of self-employed and PAYE earnings, there are specialist lenders that will take into account both types of income. This is especially true for high-net worth individuals with access to private banks accustomed to dealing with varied and complex income sources. The amount of borrowing available will depend on the lender’s affordability criteria and your outgoings.
When applying for a mortgage as a self-employed individual, lenders may also want a copy of an SA302 form for self-assessment taxpayers, or a tax year overview from HMRC for the past two years. This will prove your current and previous earnings to a lender, but you will also have to show future income. Company directors will need evidence of salary or dividend payments, contractors will be required to provide a copy of their current and previous contracts and you may also be asked for evidence of future clients or upcoming contracts or commissions.
If you’re newly self-employed and only have one year or less of accounts, don’t worry, it’s not impossible to get a mortgage, though your choices may be more limited. The more evidence you have, the better. In addition to providing evidence of your income, you will also have to provide evidence of your identity in the form of a passport or driving licence, and six months’ worth of bank statements.
Lenders will also carry out a credit check to make sure that any credit agreements are being well maintained and they may also use credit-scoring models based on various factors to help them reach a decision. Sometimes, an accountant’s reference or a letter from the financial directors of the company may also be requested.
In conclusion, when it comes to calculating self-employed income, lenders will take into consideration your employment status, your income history, and your future income prospects. They will also take into account your credit history and your outgoings. The more evidence you have, the better your chances of getting a mortgage. So, make sure you have all the necessary documents ready and take the time to understand the process, and you’ll be on your way to owning your own home.
If you’re self-employed and thinking about buying a home, Speak to an Active Adviser today and take the first steps towards homeownership.
