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Being Self-Employed comes with many benefits, especially the independence it provides. On the downside, Self-Employed applicants may find it challenging to secure a mortgage, given the sometimes uncertain nature of their employment. This has increasingly become the case after the credit crunch.
In this article, we intend to focus on clearing all possible doubts Self-Employed applicants might have about applying for a mortgage and discuss the common issues that they may encounter.
Although commonly referred to as "Self-Employed Mortgages", High Street Banks and Building Societies do not have a particular category of mortgage for the Self-Employed. Whether you are Employed or Self-Employed, the process of applying for a mortgage is the same, and so are the deals or the products offered by Mortgage Lenders.
Therefore, contrary to popular misconception, there are no "Self-Employed only" products. The only variable factors are the documentation involved in an application and the way each Lender assesses it. The criteria adopted by each Lender to evaluate a Self-Employed Mortgage application is unique to them.
It’s true that obtaining a Self-Employed mortgage can be tricky. Lenders perceive the nature of self-employment to be risky because of the lack of guaranteed continuity of employment.
However, with the right understanding of the Lender's criteria, Self-Employed people can overcome these barriers. Matching an applicant with the right Lender is crucial.
The documents required for mortgage applications for Self-Employed people are the same as for employed applicants, except for proof of income. Evidence of income required for Self-Employed people depends on the type of income that is used in the Lender’s affordability assessment.
If salary and dividends are used, then SA302s forms and tax overviews are required; if profits and salaries are used, then the annual accounts accompanied by the accountant's certificate will be required. In both situations, the Lender will need to see business bank account statements to evidence the sustainability of revenue in the business.
In terms of the standard documents required, regardless of the type of employment the applicants are engaged in, expect to have to provide proof of identity, proof of address, and personal bank statements.
When it comes to Self-Employed applicants, some may struggle to collate the necessary documents to prove income. However, gone are the days when mortgages were granted without proof of income, as the Financial Conduct Authority banned self-certification mortgages in 2011. Therefore, all Lenders need to see sufficient evidence of income to ascertain whether a potential mortgagee can keep up with the mortgage repayments.
It is worth mentioning that a very few Lenders will consider instances where applicants do not have sufficient income or, indeed, have no income. However, this is not usually applicable to Buy-To-Let mortgage applications, as it is believed that such mortgages are self-funding. That is, mortgagees are assumed to meet the mortgage payments through the rental income received from the property.
These are mortgages where the applicant is not required to prove their income to the Mortgage Lender. High Street Banks and Building Societies assume that applicants are genuine and honest with regard to the declaration of their information. However, such mortgages are banned in the UK by the FCA. The reason is some applicants took advantage of self-certified mortgages and got themselves granted mortgages that they could not afford. Hence in 2011, these loans were prohibited, and now Mortgage Lenders need to see sufficient evidence of income and supplementary documents, and applicants are subjected to stricter assessment.
This is a document issued by HMRC that evidences an individual's total earnings for the tax year under consideration. This will be made available upon submission of a self-assessment tax return. It is compulsory for Self-Employed people to file a tax return, and the SA302 will state all taxable income streams and the tax liability to HMRC. An SA302 is a vital document for Self-Employed applicants when submitting a mortgage application.
High Street Banks and Building Societies consider many aspects when ascertaining the amount of mortgage to be granted to a mortgagee, including earned income, financial commitments, loan term, and the loan-to-value (LTV) ratio of the application; all these factors will affect the amount that could be borrowed against a property.
However, the tricky question for Self-Employed people when determining the amount that could be borrowed is how their income will be considered. All Lenders consider the salary and dividend figures on an SA302, but most Self-Employed applicants will find this insufficient to cover their mortgage requirements. However, some Lenders accept the profits and dividend figures appearing in the annual accounts which, in most cases, provide higher affordability to Self-Employed applicants.
Therefore, after ascertaining how income will be assessed, the affordability calculation will be carried out to arrive at the final affordability figure. This calculation will depend on each individual Mortgage Lender, and applicants might find this difficult as this is an exhaustive calculation after considering each Lender's lending criteria. Hence consulting a Mortgage Broker will be a wise move.
The "right" mortgage deal is a very subjective concept. Ideally, all applicants require a mortgage that has the lowest cost over the mortgage deal period. However, this might not always be the case. Applicants may prioritise factors such as the ability to exit the deal without being charged, having the mortgage linked to savings (having an offset facility), or raising capital with less hassle, over the cheapest deal for the preferred deal period.
Therefore, to find the right mortgage for any individual, a Self-Employed applicant’s circumstances and requirements should first be discussed in detail. Afterwards, the "right" deal should be sought in the market, and the lending criteria of the High Street Bank or Building Society which offers the deal should be matched. This meeting of requirements can be quite challenging, especially for Self-Employed applicants. Hence the assistance of a Specialised Mortgage Broker would help them to find the most suitable mortgage deal.
An application can be declined for many reasons. The main reason is an application is placed with a Lender but does not meet their lending criteria. Other common causes might be when one or more of the applicants do not meet the Mortgage Lender's threshold credit score, or there are structural or other issues relating to the property itself, etc.
After an application has been declined Mortgage Lenders may, in certain instances, reconsider the application if an “appeal” is requested. However, for the rejection to be overturned, the applicant's circumstances should have improved or the reason for the decline removed. This is assessed on a case by case basis and, in most instances, Lenders do not overturn their original decision.
In such an instance, applicants need not lose hope. There are Specialist Mortgage Lenders who would be prepared to consider the application and who are comfortable with less than perfect circumstances. For example, most High Street Lenders would not consider adverse credit applicants, but there are Specialist Lenders who are willing to lend to such applicants. However, it is always prudent to carefully select the right Mortgage Lender without first having faced a mortgage decline, as this will impact your credit scoring and cost money and time.
Getting a mortgage with retained profits is not possible at the moment. Lenders would consider the business's retained profits in assessing an application; however, they would not allow it to be regarded as a Self-Employed applicant's income.
In short, the answer is yes! Dividends or the self-assessment figures (which is the combination of salary and dividends) is the most accepted income for Self-Employed applicants. Lenders usually require at least three years of self-employment figures to enumerate affordability.
However, a few Lenders will consider two years’ worth of self-assessment figures. For you to afford a mortgage through the Self-Employed route, you should have received a healthy amount of salary and dividends from the business, but in most applications, this is not the case. This is important as most Mortgage Lenders would take the average of the self-assessment figures across the considered period.
Few Mortgage Lenders allow Self-Employed applicants to use account figures, i.e., profits and dividends for affordability. However, those that do would want Self-Employed applicants to have at least two years’ worth of annual accounts, despite using the latest figures.
Lenders would also be interested in ascertaining whether there had been drastic fluctuations in the accounting years' annual account figures.
Having just one year of accounting figures would make securing a Self-Employed mortgage a very challenging task. Mortgage Lenders usually require a good self-employment history; that is, to have at least two years' worth of annual accounts, to understand the company's revenue sustainability. Therefore Self-Employed applicants should consider alternative income assessment methods such as the contractor day rate route.
Getting a mortgage with two years' annual accounts is relatively common for Self-Employed applicants. There are Mortgage Lenders who are willing to consider two years’ annual accounts to assess income. However, it is noteworthy that most Lenders would use the average of two years’ Self-Employed figures if it appears that the numbers have improved over the two years and (should this be but??) will use the latest year's, if figures have declined in the latest year's annual accounts. In addition, to gain more confidence regarding the sustainability of revenue, Mortgage Lenders would seek confirmation from the applicant's accountants.
Yes, Self-Employed applicants certainly can obtain a Help To Buy equity loan. Help To Buy authorities are comfortable with all forms of legitimate income.? They would assess the income in the same way that the Lender that the mortgage application is placed with evaluates it.? Hence it is essential to submit the mortgage application to a Lender with whom the mortgage requirement is affordable.
Self-Employed applicants with bad or adverse credit will find it challenging to place their mortgage application with a High Street Lender. However, there are Specialist Lenders who primarily focus on catering to such applicants. These Mortgage Lenders consider applications on a case by case basis and will most likely undertake manual underwriting. Finding such a Specialist Mortgage Lender that suits Self-Employed applicants requires a great deal of research and a thorough understanding of the Lender's criteria. Therefore, the assistance of a Specialist Mortgage Broker will be helpful.
High Street Banks and Building Societies do not have separate products for the employed and the self-employed. Regardless of the type of income an applicant earns, everyone is eligible for any deal offered by a Mortgage Lender, given that their lending criteria are met.
There are Mortgage Brokers who specialise in offering mortgage consultancy services to Self-Employed applicants. As it can be quite challenging to obtain the required mortgage fund for Self-Employed applicants, given the nature of the work carried out, getting a Specialised Mortgage Broker's assistance will provide a hassle-free mortgage experience.
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WIS Mortgages and Insurance Services is a trading style of WIS
Contractor Mortgages Ltd which is registered in England and Wales.
Registered Number 11496588.
Registered Office 4 Imperial Place,
Maxwell Road, Borehamwood, England, WD6 1JN.
WIS Contractor Mortgages Ltd is authorised and regulated by the Financial Conduct Authority. Registered number 824411.
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