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SELF EMPLOYED MORTGAGE

WHILE YOU RUN YOUR BUSINESS LET US MANAGE YOUR SELF EMPLOYED MORTGAGE.

Being Self Employed can cause some frustration when proving your income to lenders. Talk to Twin Pine Mortgages about strategies and tips to set you on the right path and get you the self employed mortgage you need.

Being self employed can be very rewarding but same time it comes with its challenges. Such as, your income might not be as straightforward as an employed income. Your income may include drawings, salary, dividends, and director loans or you may be retaining profits in the business. The main issue being it might fluctuate from year to year.

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Many mainstream lenders are picky about whom they will lend to and have stricter criteria, but specialist lenders specialise in self employed mortgages. Working with a self employed mortgage broker, like Twin Pine Mortgages, we can find a lender who knows how to deal with your situation. We have built great relationships with specialist lenders and an excellent track record of getting mortgages for self employed people.

Mortgage Requirements for self employed people.

Being your own boss can be very rewarding but getting a mortgage when self employed may prove more tricky. Lenders will want to understand your income, accounts and future earnings in detail and apply their own criteria. They will typically want at least 2 years of evidence with some requiring 3 years. With hundreds of lenders out there this can make the task of buying a new home or remortgaging more time-consuming and difficult, with a number of additional mortgage requirements for self employed people.

How to get a mortgage when self employed

 

The main requirement for most lenders will be to prove that your income is consistent, sustainable and reliable. Let's look at different types of income in more detail:

Sole trader mortgages.

A sole trader mortgage usually needs to be backed up with a 2-year trading history. You will need to demonstrate where your income comes from i.e. what different sources of income there are and how much this fluctuates. You'll need to show that you pay tax on your earnings by showing your tax calculations and tax year overviews you've submitted to HMRC. These may have been prepared by an accountant but it's still acceptable to have completed your self-assessment yourself. You will also need to show money coming into your bank account and how much you spend on your trading costs. Most lenders will require your last 3 months' bank statements but some may need up to 12 months.

The longer you've been trading the easier you will find it to demonstrate your income is stable and reliable. There are lenders on our panel that will allow just 1-year trading history with some as little as 6 months.  

Limited Company Director mortgages.

Company Director incomes can vary and be made up of different streams but usually salary and dividends. Your salary is probably below the current tax-free personal allowance threshold with the bulk coming from dividend income. Any good accountant will be helping you to structure your income in such a way as to make your income as tax efficient as possible. You may not be taking all the profit out of your business to help reduce your tax bill and build up a cash reserve in your business bank account.

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Lenders will view all of this very differently which can make finding the right mortgage more time-consuming and complicated. Some will use your salary and dividend income and some will use the salary and net profit of the business. Lenders will also take into account the track record of income and adjust to compensate for your business profit either increasing, decreasing or fluctuating. For example, if your business profits have fluctuated or increased they may use an average of the last two years' income. If your business profits have declined year on year they may take just the lowest year's income. Lenders can also write to your accountant to get a reference.

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As proof of income, you will need to show your personal bank statements, usually 3 months' worth, plus your last 2 years' tax calculations and tax year overviews. You will also need to prove your business income by providing the last 2 years' company accounts plus business bank statements, usually 3-6 months' worth. Some lenders will want a 3-year track record for the business average their calculations over the whole period. If you've just started your business your options will be limited and may need to wait until you have at least 1 year of accounts and evidence of income. There are lenders that will take a view on this if you can provide an accountant's projection and/or business plan.

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As you can see, there are a lot of different approaches and variables when it comes to getting a new self employed mortgage in place if you're a company director. That's why we do the research, gather the paperwork together and apply for the mortgage on your behalf.

Contractor mortgages.

When it comes to getting a self employed mortgage for a contractor, most lenders will want to know what type of contractor you are and how long you have been doing it for. If you are working for one company and a 1-year contract or longer you may be able to apply for a mortgage as an employee, depending on how much of the contract you have left.

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You could be a 'day-rate' contractor which means you will probably have a very short-term contract (3 months) and move from contract to contract. In these cases, the lender will want to see your contract history and how much the income fluctuates. If you've had a gap in between any of the contracts over the last year of 4 weeks or more you'll find getting a mortgage more difficult. Equally, if you've just started your first short-term contract, you may need to wait until you've built up a track record of contracts over a 12-month period. However, if you've moved from an employed role and become a contractor, doing the same type of job, you may getting your new mortgage more straightforward. When it comes to assessing how much income they will use, lenders will annualise your contracts and multiply the day rate over 46 to 48 weeks to allow for holidays.

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If you contract under an umbrella company, you could be classed as a normal employee, depending on how you pay your tax. If you work in construction you may be classed as a CIS (Construction Industry Scheme) contractor. You will still be classed as self employed but, as your tax is deducted at source, be able to include this again as part of the lenders' income assessment.

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The lender will require you to provide your contracts over the last 6-12 months, evidence of any upcoming contracts or evidence that the contract will be extended, and your pay slips if you're an umbrella or CIS contractor and you may be asked to provide an up-to-date CV. You will also need to supply at least 3 months' worth of personal bank statements but this could increase to 6 months depending on the contract. If you contract under your own limited company for tax purposes you will need to supply the same evidence as a company director (see above).

Freelancer mortgages.

A freelancer is someone who is self employed and hired to work on short-term projects. Freelancer mortgages are viewed very similarly to sole trader mortgages. Most lenders will want to see a longer period of income history so you may need to provide a 3-year track record. Some specialist lenders will take into account a 1-year track record if you have more contracts lined up for future work. 

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As with mortgages for contractors you may need to show your work experience through a CV along with your previous contracts. Like sole trader mortgages, you will need to provide your tax calculations, tax year overviews, personal bank statements and accounts if you have them. If you are freelancing under your own limited company you will need your company's finalised accounts plus business bank statements covering at least 3 months. 

How will a mortgage lender for self employed mortgages calculate my earnings?

Lenders will all have different criteria when it comes to calculating how much they will lend you based on your self employed earnings. The majority of lenders will use your earnings over the last 2 or 3 years and either use an average of these years or use the latest year, whichever is the lower figure. There are some lenders which will base their figures on 1 year's evidence of income plus an accountant's projection if you've only been trading for 1 year.

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A mortgage lender for self employed mortgages will also have different criteria when it comes to which parts of your income they will use. Some will use your salary plus dividend income, some will use your share of net profit and some will use salary plus net profit. This will largely depend on your business structure and whether you are a sole trader, contractor or company director.

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After these areas have been worked out, the lender will apply their own 'affordability model' to your earnings to give you a figure on how much they will lend for your self employed mortgage. These models are often closely guarded secrets but often take into account your likely outgoings, your income and how many people will be living in the property or dependent on your income. They will also apply a 'stress test' to the amount you want to borrow to see if interest rates rise you could still afford the mortgage. This is why some lenders will lend you more if you fix your mortgage rate for 5 or more years because changes to interest rates will not impact your mortgage.

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As a general rule of thumb, you can borrow around 4.5 times your annual income with some lenders considering up to 4.75 times. So, as you can see, there is a lot to consider and it's a good idea to do your research into how each lender uses your income to calculate how much you can borrow or get an expert like us to do it for you.  

The benefits of using a self employed mortgage broker.

Our team of brokers will get to know you, your income arrangements and what you want to achieve, doing the leg work for you. While there are some obstacles to consider along the path to success, it is usually still possible to reach the dream destination of getting a self employed mortgage and we are here to help.

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Being self employed can be very rewarding but at the same time, it comes with its challenges. Such as, your income might not be straightforward as being in an employed role and it might fluctuate from year to year. Many mainstream lenders are picky when comes to whom they will lend to and have stricter criteria but there are specialist lenders that do specialise in self employed mortgages. Working with a self employed mortgage broker (like us), we can find a lender who knows how to deal with your situation.

 

When you are self employed, mortgage advisers support can be invaluable. We have built great relationships with specialist lenders and an excellent track record of getting mortgages for self employed people. Here are a few examples of what we can offer:

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  • We can find lenders that require only a 5% deposit

  • We can help you with just 1 year of trading history

  • We can use the latest year's figures rather than the average of the last 3 years

  • We have access to specialist lenders who would consider using retained profit within a limited company

  • We have access to specialist lenders who would consider a self employed mortgage with a CCJ or bad credit

  • We do the research to find a lender from our panel to lend you the amount needed and give the advice to put everything together in the most cost-effective way.

Self employed mortgage with a CCJ or bad credit.

Getting a mortgage if you are self employed can be challenging enough but if you combine that with a CCJ or other forms of bad credit history it can be a nightmare. The combination of income that can be potentially unreliable or that fluctuates alongside an indication on your credit profile that in the past you have not paid a debt can make lenders run for the hills.

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However, you can get help from a specialist self employed broker like us. As well as being able to use all the high street lenders we have a range of specialist lenders available to us. These specialist lenders will very often take a more open-minded approach to who they will lend to and will charge a higher interest rate for taking on more 'risk'. They will also not base their entire lending decision on a credit score but on the case as a whole.

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Getting a self employed mortgage with a CCJ can be made easier just by knowing a bit more about how and why the CCJ was issued to you. For example, if you can explain to the lender what was happening at that point in time and present this in a clear way to paint a picture of your circumstances it can really help. If the CCJ was issued some time ago and paid promptly with no issues since it is likely the lender would view this as a 'one-off' event.

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Other forms of bad credit such as defaults, debt management plans and bankruptcy are all areas that Twin Pine Mortgages can help with when it comes to getting a self employed mortgage.

Common reasons for a declined mortgage application and what to do:

 

  • Poor credit history

Check your credit file with the credit reference agencies to see what information they have about you. If any of the information on your credit report is wrong asked them to correct it.

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  • Not registered to vote

You need to be on the electoral register at your current address so lenders can confirm who you are and where you live.

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  • Too many credit applications

When you apply for credit, the lender will search your credit report to check your suitability. Most searches are recorded, leaving a mark on your credit history. Applying for lots of credit over a short period makes it look like you have money problems, so try to avoid taking out new credit deals at least a year before you want a mortgage.

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  • Too much debt

Having too much debt is likely to reduce your chances of getting a mortgage. Reduce or pay off some of the debts before applying for a mortgage.

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  • Payday loans

Any payday loan you’ve had over the last 6 years will be listed on your credit report, even if it is paid off on time. It could count against you as lenders might think you may not be able to cope with the financial responsibilities.

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  • Not earning enough

You could look for a smaller mortgage or see if you can qualify for a lender's specific products or one of the government home-buying schemes.

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  • Not fitting the lender's profile

Lenders have different lending criteria, and they look into several factors when assessing your mortgage application. It could be based on a combination of age, income, employment status, the loan to value, property type and location. 

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