Getting a mortgage when you’re self-employed needn’t be as difficult as it’s sometimes made out to be. Most lenders are just as ready to lend to the self-employed providing the income, and the sustainability of the income can be properly evidenced in line with the lenders criteria. It is the latter point here that makes the transaction more different as lenders have specific criteria for those self-employed. The affordability calculations are often different too and there are more elements to consider but understanding and having knowledge of all this is the fundamental job of a broker. Having a good broker in your corner should ensure the fact you’re self-employed has no bearing on how difficult it is for you to get a mortgage.
When we refer to people who are self-employed, we’re referring to those who are sole traders and those who are directors of a limited company. As a director of a limited company, most mortgage lenders will class you as self-employed if you own more than 20% or 25% of the shares in the business.
So what income figures are used for the mortgage affordability calculation?
For sole traders, mortgage lenders will generally use the income figures generated once the tax return is completed. For limited company directors, it is a little more complicated as the individual and the business are separate legal entities. Money is earnt by the business and paid out to the director as salary or dividends. Depending on the lender applied to, they will use a combination of salary, dividends and the share of the business net profit for the income figures.
So what documents are needed to verify the income figures?
For sole traders, most lenders will request tax calculation documents which show the money earnt and hence the tax liability of the individual. They will also request a tax year overview document which verifies the tax that has been paid. On occasions, they may also ask for sole trader accounts to see a more detailed breakdown of this. For limited company directors, if the lender uses salary and dividend income, they will want these same tax calculations and tax year overview documents. However, if the lender uses net profit figures, they’ll want the company accounts to verify these figures. The tax year overview document is requested to close the loophole of people declaring a high-income figure for the mortgage application and then redoing their figures to declare a lower figure to reduce their tax liability. It is therefore vital that the tax calculation and tax year overview documents match, otherwise the lender will not offer the mortgage.
So how are mortgage lenders currently treating applications from those self-employed?
The majority of banks and building societies simply want to see the latest business bank statements showing income which supports the figures declared on tax documents or business accounts. If this is the case, they are generally quite happy to offer the mortgage subject to other standard underwriting procedures. There are some lenders requesting references from accountants or requiring specific declaration forms to be completed as part of further underwriting.
To finish, let’s touch on some self-employed criteria in today’s Covid-19 affected market and more general, historic misconceptions. You don’t always require two years’ figures to be eligible for a mortgage when you’re self-employed. There’s a small selection of lenders happy to use a business that’s been operating just one year or use the latest years’ figures. In terms of Covid-19, this has evidently had a negative impact on many businesses and some lenders are now prepared to ignore 20/21 figures and use 19/20 figures providing the business has returned to normal trading levels. Also, for those who have taken the Self-Employed Income Support Scheme Grants, this income can be used for mortgage affordability and taking the grants does not mean you would not be eligible for a mortgage.
Many mortgage myths get branded around, especially in relation to those who are self-employed. As with all mortgages, if you’ve got a good broker in your corner, you shouldn’t have a problem getting through! If you want to know more about getting a mortgage when you’re self-employed or want to discuss your own unique circumstances, we’re here with free professional advice.