Before the credit crunch it was relatively easy for self employed people to get a mortgage. Today it’s a very different picture, but it’s not impossible to get a loan. So how long do you have to have been trading for and what can you do if you’re relatively new to business?
What mortgage lenders look for
Most of the lenders want you to have at least two years of accounts. Because most self-employed people prepare their accounts so long after the end of the tax year you could have been trading for well over three years.
Even if you can produce two years’ accounts, it’s worth bearing in mind that:
1. The accounts should be relatively recent. If you’re applying for a mortgage and your accounts are more than several months old, the mortgage lender may ask for further proof of income such as an accountant’s certificate or SA302 (tax calculation) form.
SAVVY TIP: If you’re thinking of applying for a mortgage it’s worth getting your accounts done before you do, says Ray Boulger of mortgage brokers John Charcol. “Lenders wouldn’t be too impressed if your accounts are out of date, so make sure they’re as up to date as possible.”
2. Your income should be stable or rising. If your business is new, lenders will understand if your earnings are low in the first year but they will want to see that your income is on the way up.
SAVVY TIP: Lenders may not mind minor fluctuations but they will be concerned about a fall in earnings unless it’s something you have a very good explanation for.
3. The vast majority of lenders carry out a credit score. Doing a credit score means they look at factors such as how long you’ve lived in your property for, whether you’re married or single, how long you’ve had your bank account for and whether you’ve changed address recently. Find out more in my article called: Understanding your credit score; what affects your credit score and how to find out what it is.
SAVVY TIP: People who are self employed always score lower than those who are employed so if you’ve switched bank accounts recently and moved several times, your credit score could be significantly lower.
If you only have one year’s accounts
If you only have one year’s accounts you may still be able to get a mortgage but your choice of lender will be severely limited.
You should also try to:
1. Keep your borrowing below 75% of the property’s value. Your application will be much more closely scrutinised if you borrow more than 75%.
SAVVY TIP: Mortgage broker Ray Boulger says that if you want to borrow more than half a million pounds you may be able to get a mortgage from a private bank. “These banks take a more rounded view of your finances and will also look at the assets you have.”
2. Go to a lender that uses an underwriter to assess applications. They are likely to be more flexible in their approach.
SAVVY TIP: Many of the larger lenders use a computerised scoring system but some are more flexible when it comes to self employed applicants. A good mortgage broker will be able to tell you which lenders are worth approaching.
3. Choose a similar line of work to your existing job, if you’re going self employed. Mortgage lenders look for a track record so if you’ve worked for a company and are going freelance but doing a similar job, that will be seen as a lower risk than if you’re taking a complete change of direction.
SAVVY TIP: If you have a couple of contracts for your new self-employed role that will help your application. However, you are still likely to struggle to get a mortgage if you’ve been self employed for less than a year, even if you’re doing a similar job as before.
If you have a limited company
If you have a limited company you’re likely to be paid a mixture of salary and dividends, that could make it harder to get a mortgage, especially if you choose to take a lower salary and leave money in the company.
Salary and dividend payments. Some lenders will only look at the amount of money you’ve taken out of the company in salary and dividends, which may not be enough to get you the mortgage you want or need. However, if you leave money in the company. Some lenders will also take retained profits into account.
SAVVY TIP: If you’re taking a lower salary it may be worth increasing your dividend payments, says mortgage broker Ray Boulger. “Talk to your accountant and to a mortgage broker about what’s feasible and what you might have to do in order to get a mortgage.”
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