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What Income do Mortgage Companies look at Self-Employed?
What counts as Self-Employed?
A Self-Employed person will fall under one of the following categories for the purposes of a mortgage application. Each type counts as Self-Employed income, but will be assessed slightly differently and require slightly different proof:
- Sole Trader/ Freelancer
- Limited Company Director
- Partner – owning 25% or more of the business
Whilst business owners and professionals who trade independently often earn more than people in employed roles, there tends to be a higher level of fluctuation in their income, which makes it difficult for lenders to see a stable income pattern.
Proving your income
In order to mitigate this risk, Mortgage Lenders require Self-Employed applicants to evidence a more substantial working history, with two to three years of proof being a typical request.
Some lenders offer mortgages to Self-Employed applicants who have been trading for just one year, however, so it’s important to approach the right lender for your needs. We can help you to find a lender who offers competitive deals to match your circumstances.
To establish the loan amount, lenders assess your affordability and credit rating, in the same way as they would for employed people. The only difference being that they will typically use an average of your earnings over the two to three year period, whereas for employed people, their current salary is used.
Proving your income as a Sole Trader
Sole Trader or Freelance workers will need to prove their personal income. Lenders accept the following as proof:
- Accounts covering two to three years – these must be certified by a qualified accountant
- SA302 self assessment forms to cover the same duration
Proving your Income as a Company Director
Limited Company Directors usually provide two to three years proof of their personal salary and dividends. Lenders, again, will calculate an average income from this whole period in order to establish affordability. Some lenders will also look at your net business profits, however, this is less common practice.
If you part own more than 20-25% (the variance is based on different lenders’ individual criterias) then your share of the net profits are used to calculate your mortgage affordability.
If you are a Limited Company Director or part owner of a business, you will need to provide the following proof:
- Certified accounts for the lender’s defined duration
- SA302s for the same period
- Business banking statements
- You may need to further support your application with projected future income or business plans in some circumstances
Proving your income as a Contractor
As a contract worker, some lenders will assess your income similarly to Sole Traders and others will use an annualised version of your day rate (if this applies to you). To prove your income, you will need to provide:
- Fully certified accounts covering the requested period
- SA302 forms as above
- Evidence of ongoing availability of income (for example, signed contracts)
Do Self-Certified Mortgages still exist?
Self Certification mortgages were banned by the Financial Conduct Authority in 2008 due to unprofessional lending practices. Self-Employed must now substantially evidence their income.
How do you go about getting a mortgage if you are Self-Employed?
From the perspective of the application, a Self-Employed mortgage application is exactly the same as it is for any other applicant, other than the additional proof of income requirement.
Being Self-Employed does not lower your chances of obtaining a mortgage offer, so long as you can satisfy the lender criteria. Using a Mortgage Broker like ourselves will ensure that you approach the right lender, whose criteria you meet.
How do I improve my chances of my mortgage application being approved?
Preparation before you apply for a mortgage is key to a successful outcome. The following tips will help improve your chances of securing a mortgage offer:
- Financial preparation – target your income to meet the loan you require, maybe draw extra dividends or expand your services
- Ensure accounts are in order and signed off by an accountant
- Save more than the minimum required deposit (which also provides access to better rates)
- Improve your credit score:
- Correct addresses on your credit file and close dormant accounts
- Register on the electoral roll at your current address
- Pay bills and creditors on time
- Minimise use of existing credit facilities
Speak to IMS Mortgages
At IMS Mortgages, we have access to a wide range of Mortgage Lenders who specialise in Self-Employed mortgages. We can ensure that you approach those lenders who will be most likely to help you.
It’s a good idea to prepare ahead of your application, and our comprehensive knowledge of lender requirements will help you to ensure you meet the criteria of lenders who can offer the most competitive mortgage deal for your circumstances.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE