What Income do Mortgage Companies Look at Self-Employed?
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What Income do Mortgage Companies look at for Self-Employed?
The most important step in getting a Self-Employed mortgage is proving your annual earnings. Lenders want to know that your business is running well and pays you a steady income. Let’s explore how they will assess your income and how you can prepare.
What counts as Self-Employed?
Lenders consider you Self-Employed if you own more than 20% of a business that provides you with your main income. You might be a sole trader, a company director, in a partnership or a contractor.
Why is proving your income so important?
Most lenders calculate how much to lend you based on your earnings. So the first thing a mortgage company will want to understand about you is how much you earn.
This is straightforward for a typical company employee – they state their salary and confirm it with a few payslips. But when you’re Self-Employed your income can vary, so it’s harder to get a sense of your usual earnings. So lenders usually want to see two or three years worth of business records to understand your average income.
They will also request business and personal bank statements and look at your credit score.
Proving your income as a Sole Trader
From a legal point of view there is no difference between a Sole Trader’s business accounts and your personal affair; your business profits are taken as your income.
Lenders usually assess Sole Traders’ income by looking at your most recent self-assessment forms (these used to be called SA302 forms). You can access these from the HMRC website.
Proving your income as a Company Director
Limited Company Directors usually need to provide certified accounts for the last one to three years. Each year’s accounts should state your salary and any dividend payments. You might also need to provide income tax records.
Each lender will have their own rules on what they will accept as income – and this can make a big difference if you, like many directors, pay yourself a low salary to reduce your tax.
Certain lenders will accept retained profits in your business rather than your stated salary, which often means you can borrow more.
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Proving your income as a Contractor
Some lenders have special arrangements for people who work as contractors, taking on contracts for six months or longer. You may find they will accept your day rate as the basis for your income. This can be helpful as it looks at your gross income rather than post-tax profits.
These same lenders might expect you to prove that you’ve generated consistent income, typically for 12 months to two years. They will ask to see details of current and previous contracts.
Do Self-Cert Mortgages still exist?
A few years ago, Self-Employed people would typically get Self-Certification mortgages. These didn’t require any proof of income – Self-Employed mortgage applicants just signed to confirm their income.
The 2008 credit crunch led the Financial Conduct Authority (FCA) to ban these mortgages, and set new rules demanding that mortgage lenders assess potential customers more rigorously.
What is the process to get a Self-Employed mortgage?
The first step in getting any mortgage is to talk to a Mortgage Broker to establish how much you could borrow and set your property budget.
You can then get an Agreement in Principle from a lender, which makes you a credible buyer and will help you get an offer accepted on a property.
Once you find a potential new home, you apply for the mortgage and provide all the documentation the lender needs. As long as you meet the mortgage criteria, including credit rating requirements, you should get approval.
How do I improve my chances of my mortgage application being approved?
Getting mortgage approval is a question of meeting all the lender’s criteria. This is where a Mortgage Broker like The Mortgage Centre can save you time, energy and disappointment.
We explore mortgage products across both high street and specialist lenders to recommend suitable deals – and we support you right through the process. Call our registered office today for a free initial consultation.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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