Applying for a mortgage can be a daunting task and with the self-certification mortgage no longer available, the self-employed can feel more vulnerable than employees.
However, in reality, a self-employed person now has access to the same mortgages as an employed person. Some lenders may market themselves as specialising in mortgages for the self-employed but most will routinely grant the required funds to self-employed people, so in most cases there’s no need to use a specialist.
A lender will want evidence to verify the income a self-employed person declares. Each financier will have different criteria but typically, they will ask a self-employed person for:
An Accountant’s certificate; or
The last two or three years’ accounts; or
The last two or three HM Revenue & Customs’ forms SA302 and corresponding Tax Year Overviews
For sole traders, the banks will look at what profits the business makes and in the case of partners, their share of the profits.
For directors of limited companies, the banks will either be looking at the salary they take from the company and the company’s profits, or they will look at the salary and the dividends they receive.
To give sole traders, partners and directors the best possible chance of successfully applying for a mortgage, we summarise the actions they need to take to get their house in order:
A healthy business
Nevertheless, a lender will want to see a profitable business for the period for which they have requested evidence. They will be looking for a business that has steady or growing profits; not profits that are dramatically fluctuating from year-to-year.
Banks may also look at the balance sheet in the business’ accounts. If assets exceed liabilities, this can be a tell-tale sign of a business that is in a strong, healthy position.
If you don’t have the number of years of accounts or tax returns behind you that you need, all is not lost. Some lenders may be prepared to look at contracts and jobs you have planned for the future. They may also be more confident if you’ve only just left employment in the industry your business operates in.
Tax bill versus mortgage
Unless you’re trying to sell your business, we tend to drive down profits to minimise our tax liability. However, just be wary the impact this strategy can have if you want to get a mortgage.
Keep your records in order
Make sure your paperwork is in a decent condition. Handing over dog-eared or crumpled paperwork will make the bank think you’re disorganised and unprofessional.
Be up to date
Banks aren’t fond of draft figures, so if you can, get everything finalised and filed before applying for finance. You will also need to make sure that the accounts or tax returns are as up to date as possible; and certainly, the accounts should be no older than 18 months.
Remember a bank is likely to look at your personal circumstances and that of the business, so make sure you’re up to date with payments for loans and credit cards etc.
Clean up your credit rating and save!
Whether you’re employed or self-employed, a clean credit history is always important and the bigger the deposit you have, the better your chances of being successful, the broader the range of mortgages available to you and potentially the lower the borrowing costs.
If you already have or have had a mortgage in the past and you had a good track record, the banks may be more favourable, plus you may also have some equity behind you.
A mortgage broker
Whatever your employment status, a mortgage broker or independent financial adviser can be incredibly useful. They can walk you through the process, help with the application and find mortgages that you wouldn’t come across yourself. They may also have some experience of which lenders might be more flexible if business owners don’t have the required number of accounts or tax returns for example.