Mortgages for Self Employed
Mortgages for the Self Employed can be a broad definition which is used to describe Sole Traders, Partnerships, Limited Company Directors and some Contractors.
We work with Specialist Mortgage Brokers for the Self Employed
Seeking the assistance of a Specialist Whole of Market Mortgage Broker will always be essential when it comes to getting the best Mortgage for the Self Employed.
Especially if your case is particularly complex, as discussed further on.
Our Specialist Mortgage Brokers will look at the possibility of using your Accounts as well as seeing if the Lender will assess your income in a way that better improves your borrowing capacity.
Ltd Companies and Sole Traders, dependent on the type of industry they are in, can often be assessed in the same way a Contractor or fixed term employee is. And we often find customers are completely unaware of this.
When would a Lender classify me as Self Employed?
Traditionally, Mortgage Lenders would classify an applicant as Self Employed when they own more than a 25% share in a business.
However, with some Lenders it will be less and with others, more.
It is true to say that obtaining a Mortgage for the Self Employed, can be a little more complex.
Some Lenders are definitely more friendly toward the Self Employed than others.
And just because you don’t meet affordability or the Criteria with one Lender, it doesn’t mean you won’t with others.
Common reasons Self Employed struggle to obtain a Mortgage
The following are the most common reasons applicants unnecessarily struggle to obtain a Mortgage when going direct to lenders. A Specialist Self Employed Mortgage Advisor can help with the following cases:
- Less than 2 years’ worth of self-employed accounts
- Lenders using an average of the last 2-3 years’ worth of figures or latest figures if lower
- Decline in net profit over the last 2-3 years or a loss in the latest year
- Applicants declaring, they earn up to or less than their Personal Tax-free allowance
However, there are options for the above and a Specialist Mortgage Advisor should always be sought to guide you through the process.
What evidence is usually required
Most lenders will require you to have 2 years’ worth of Accounts. And will request the following evidence:
- Up to 3 Years HMRC SA302/Tax Calculations.
- And up to 3 years corresponding HMRC Tax Year Overviews.
- Bank Statements showing Income and Outgoings.
- On occasion an Accountants Certificate/Reference or Projection may be required.
- On occasion for Limited Companies: Full set of Company accounts may be required.
These documents are used to assess your affordability, which determines how much you are able to borrow.
How much can I borrow on a Mortgage for the Self Employed?
Mortgage Lenders will usually use either of the following earnings to determine what you are able to borrow:
Net Profit: The earnings your business makes after expenses but before taxes.
Salary and Dividends: The Salary and Dividends you have been paid by your Company.
Salary and Net Profit: The Salary you have been paid by your Company and the earnings your Company has made.
Mortgage Lenders will usually use the latest or an average of the latest 2-3 years of one of the above.
Day Rate: Some who deem themselves as Self Employed can be considered as Contractors, where they are paid a Day Rate by a company. Day rate pay on average, is usually calculated using the following method: Day Rate X 5 days X 46 weeks = Annual Earnings.
Once you have found your assessable income using one of the above. You will be able to borrow up to 4.5-5.5 times your income.
More information on max borrowing figures here.
What Mortgages will I be eligible for?
Mortgages for Self Employed: In nearly all cases, you will be eligible for the same Mortgages as anybody else would.
You may need to provide more evidence than others, as Lenders will want to see that your current earnings are reflective of what is on your tax return.
This can be particularly true when there is quite a lot of economic uncertainty.
Can I get a Buy to Let Mortgage if I am Self Employed?
Yes, absolutely. Often there is less critique on your Self-Employed earnings when you are buying a Buy to Let Property, when compared to buying a residential Home.
This is because, Buy to Let Mortgages will be supported by the rental income of the property anyway. And how much you are able to borrow on a Buy to Let Mortgage is dependent on the potential rental income of the property.
1 years’ worth of self-employed accounts or Latest years figures for Affordability
The following are the options available to Applicants who only have 1 years’ worth of Self-Employed figures or need to use latest years figures for affordability purposes:
- 1 years’ worth of self-employed figures – over a dozen specialist lenders would be prepared to lend and a couple of mainstream lenders. You should be able to go up to 95% loan to value with a couple of lenders. However, most will require a 15% deposit.
- Latest years figures for affordability purposes – this could make a huge difference to what you are able to borrow. As most lenders will take an overage over the last 2-3 years. Over a dozen specialist lenders would be prepared to lend on this basis and over half a dozen mainstream lenders. You should be able to go up to 95% loan to value.
The 4 Different types of Self Employed
Sole Traders are those which own 100% of their company.
Applications will almost always be assessed using the applicants Net Profit figures for the latest year or as an average of the last 2-3 years.
There are lenders who will accept one years’ worth of accounts or latest years figures if you have been trading for more than 1 year.
This is usually the most common type of Self Employed Mortgage.
Partnerships in Mortgage terms can cover any kind of Partnership including 50/50 Partnership of a Construction firm for example, or a Limited Liability Partnership of a Professional Firm.
Partners in a Professional LLP can usually use an internal reference or an Accountants reference/certificate to verify the Partners income for Mortgage purposes.
Other Partnerships will usually be required to provide SA302’s/Tax Calculations and corresponding Tax Year Overviews.
Limited Company Directors
Most lenders will deem a Director to be Self employed when they own 25% or more of a Limited Company. If the share they own is less than this, the applicant may be able to use payslips for affordability as lenders may deem them as employed.
Most of the time the applicants share of Salary and Dividends will be used. However, some lenders will consider the applicants share of net profits, which often makes a big difference to what the applicant is able to borrow.
Again, there are lenders who will accept one years’ worth of accounts or latest years figures if you have been trading for more than 1 year.
We have a whole section dedicated to Contractors, as this is actually its own Specialist area.
Particularly when you are a Contractor which works in IT or the Construction industry, as not every lender will consider you to be self-employed.
The benefit of this is usually massive when it comes to the amount you can borrow. So, even if you have set up your own Limited Company.
If you are in one of the above industry’s or get paid a daily rate and have a contract confirming this.
Be sure to check out our dedicated Contractor section.
What are Self Cert Mortgages
This is where Lenders allowed Applicants to essentially declare what they earned without providing evidence to back it up.
The obvious risks that came with this, were applicants being able to state they earned more than they actually did enabling them to borrow amounts that were potentially not affordable.
Following the 2008 Financial Crisis this lending practice was banned in the UK by the Financial Conduct Authority (FCA).
However, a loophole allows companies outside of the UK to sell these types of Mortgages to UK consumers. And some companies have taken advantage of this. Funding becomes available intermittently and when it does, they usually sell their quota fast.
However, the FCA has issued a warning as these companies are not regulated so you have extremely limited protection if anything goes wrong. This is because they don’t have to follow the guidelines or rules set by the FCA.
Simply have a question or need to get moving. Next steps?
Not all Mortgage Advisors will have the specialist knowledge to deal with Self-employed Mortgages. Speak to one of our qualified, regulated and highly rated Mortgage Advisors.
Simply complete our short Mortgage Enquiry form and we will get one Mortgage Advisor that is local to you and which specialises in your case, to give you a call. They can answer any other questions you have, provide you with a free non-obligatory quote and/or talk you through the process in greater detail.
If you’re self employed or have had credit problems in the past, don’t worry, we can help. As a specialist in these areas, we have access to all Specialist Mortgage Lenders.
All our Mortgage Advisors hold the full CeMap qualification (Certificate of Mortgage Advice & Practice) and are regulated by the Financial Conduct Authority.
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