Applying for a mortgage can be quite daunting at the best of times. But for self-employed people of all descriptions – whether you’re a sole trader, a partner or small business owner, or a contractor on a fixed-term contract – the tighter restrictions that have been placed on mortgage lending in recent years have presented a whole new set of challenges to be overcome.
Many mortgage lenders, particularly high street banks and building societies, are now more focused than ever before on minimising their exposure to risk when assessing mortgage applications. In practical terms, that means they prefer applicants to be in full-time, steady employment with regular income from an easily verifiable source.
For the self-employed and others who don’t have the luxury of an employer’s payslip to prove their monthly income, that can present problems.
The very nature of self-employed, freelance and contract work can mean that your income may vary from month to month, and profits can be substantially different from year to year depending on prevailing market conditions and a hundred other factors. Many of which may be out of your control.
Despite these complications, it would be wrong to assume that it’s impossible for a self-employed person or contractor to get a mortgage – however it is important to understand that there will be a greater burden on you to prove not only your past and current income, but also the sustainability of that income in years to come.
You’ll also find that, rather than a straightforward income multiple as may be used for mortgage applicants in regular employment, the amount you will be able to borrow will be subject to more complex and rigorous analysis.
Lenders will take into account such factors as your average monthly income or net profits from your business (or your share of the net profits in the case of a partnership), sustainability of income and profit trends, your available deposit and of course your credit score.
Providing evidence of your income or profits
It is usual for lenders to ask for two or three years of business accounts, although there are currently lenders on the market who only ask for records going back twelve months.
Most lenders require the accounts to have been prepared by a certified or chartered accountant, and it’s also important that you understand what these records show, in the event that the lender raises specific queries – for example around a period where your profits or income dropped.
Many lenders ask for a copy of your SA302 tax assessment calculation as further proof of your declared income. You can obtain this form on request from HM Revenue & Customs, or alternatively you can print off a copy if you complete your tax assessment online. Some lenders may also accept the SA302 as sole proof of income in lieu of business accounts, although this is less common.
If you are self-employed, a contractor or director of a small limited company, it’s a good idea to gather as much evidence as you can to build a positive business case for your mortgage application – and you should start getting this information together as early in the process as possible.
Business records from your chartered accountant, your SA302 from the HMRC, bank statements and full details of any existing credit commitments can all take time to come through if you’re in the position of having to request copies to support your application.
By dealing with an impartial mortgage advisor with experience in dealing with self-employed and contractor mortgage applications, you can benefit from qualified, unbiased advice about both the type of mortgage that best suits your unique circumstances, and the ins and outs of presenting a strong portfolio of income evidence to the lender in support of your application.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage payments.
Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.