It’s not always easy to get a mortgage if you are self employed but it is possible, you just have to be patient. Joanne Atkin finds out what you need to know
Figures from the Office of National Statistics show there were 25 million people classed as ‘employed’ last year compared with almost 4.2 million who work for themselves. This means that around 17 per cent of the UK’s workforce, or one in six people, are self-employed.
So why is it, apparently, more difficult to get a mortgage than if you have a regular job and regular income?
Affordability is the key word for lenders, particularly after 26 April 2014 when new mortgage rules come in. Lenders want to make sure that anyone they lend money to will be able to pay it back – not just now but in the future too. They will take into account all sorts of information about your income as well as making calculations about your ability to afford a mortgage if interest rates go up in the future.
If you are employed by a company, salary can be easily taken into consideration but if you are self employed proving your income is not always so simple, especially if you are new to the self employment market.
Generally speaking lenders require a minimum three year history of being self employed supported by two years of SA302 tax documents from HM Revenue and Customs (SA302 states how much tax you owe) and/or two years of trading accounts in the form of year-end finalised accounts produced by an accountant. But this is not true of all lenders; some may only want to see one year of SA301 or accounts, while others are just more flexible and will look at each case on its own merits.
The problem is that self employed people’s income fluctuates and also building up a business can take time so income in the early years may be lean.
Definition of self employed
Some lenders also have different definitions of what constitutes self employed but they are usually a sole trader, a sub contractor, a freelancer, someone working on a fixed term contract, a partner in a business or a director that owns a certain percentage of the company.
Fixed term contracts
Fixed term contracts are where a job is only for a set period, although the contract may be renewed or extended. You will generally need to supply information such as the length of time with your current employer and remaining term of the current contract. Lenders might want to know if the contract has been renewed before and if it is likely to be renewed and, if so, for how long. You might also be asked about the prospects of getting alternative employment in the same type of work at a similar salary.
Dudley Building Society is prepared to take a view on the historical nature of employment and will not necessarily need to see a contract lasting for longer than 12 months. Whereas at Nationwide at least a 12 month track record of working on this basis is required.
Company director
Different lenders have varying rules when it comes to owning a stake in a company. For example, Nationwide Building Society says that if a client has a 20 per cent or less share holding, they will be treated as ‘employed’ so their P60 and latest payslip will be required to confirm income. If a borrower has a 20 per cent or less share holding and P60 and payslip income is not enough to support the loan Nationwide will treat them as self employed.
For someone who has been self employed for less than two years, but is working as part of a business that has been established for longer, the application may be referred to an underwriter who can assess individual circumstances.
At Lloyds Banking Group, which includes Halifax, applicants with a shareholding of 25 per cent or greater in the company through which their income is derived, will be treated as self employed. Verification of three years income by way of SA302s, accountants’ reference or accounts is required. For limited companies Lloyds Banking Group uses the combined figures of dividends plus salary drawn.
At Barclays Woolwich applicants are regarded as self-employed when they hold at least a 15 per cent share in a company, or they are directly related to other principals in the business which employs them. For example, if an applicant is employed within a business owned by a relative, they would be classed as self-employed and their salary must be confirmed through the latest P60 and the principal’s accounts.
If the financial year-end for the most recent set of accounts or SA302s is more than 12 months ago, the applicant must provide additional information to Barclays Woolwich. For sole traders and partners, this would be a forecast income and expenditure document while directors and limited companies must provide the latest draft trading accounts. These documents must be produced and signed by an accountant covering the period since the last trading accounts were issued.
Applicants with an existing business relationship managed by Barclays will be considered to be within standard lending policy even if the last trading year end was up to 18 months ago.
Barclays says: “With all self employed application each case is individual and as such we may have to refer a case for manual assessment by an underwriter.”
Santander accepts evidence of income in various forms from self-employed applicants. The most recent evidence must cover the trading performance of the business from no more than 18 months ago.
Lending criteria, such as loan-to-values, are generally the same whether you are employed or self employed. At the Post Office Post Office income multiples are 4.25 times income for employed and self employed, single or joint applications.
HSBC says: “When assessing a mortgage application for self-employed applicants the only difference is in relation to the proof required to establish their income. Due to the fluctuating nature of a self-employed applicant’s income, we generally require the last three years signed audited or certified accounts or tax returns in order to prove income.
“The primary concern is alwaysthe ability of the applicant to meet the regular monthly payments as they fall due. The products and rates available to self employed applicants do not differ to those offered to all other applicants.”
Jeremy Wood, chief executive at Dudley Building Society, said that future earnings can be taken into account assuming the accountant is prepared to provide an opinion.
He added: “The important thing to remember is that self employed income tends not to conform to a neat tick box underwriting environment. Smaller mutual lenders can therefore score over larger players by being able to complete a detailed understanding of how drawings are made, perhaps look at multiple sources of income and how they might be taken into account. There is no substitute for human underwriters, particularly with self employed applications, where in many cases the use of a computer generated underwriting system by other lenders can tend to be a precursor to rejection.”
Dudley works though the intermediary market and always recommends that people talk to a registered broker. Mortgage intermediaries should have a good idea of which lenders will lend to the self employed and on what basis. So the first step is to talk through your requirements with a broker and make sure you have all your income evidence to hand as lenders will go through it with a fine tooth comb.
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