Getting a mortgage is a tough process for anyone but if you are self-employed there are more hoops to jump through if you want to get on the property ladder or remortgage.
Banks and building societies now approve home loans based on affordability criteria and stress testing.
They want to know how much income you earn, your net worth, and how you could cope with changes in your monthly repayments.
This can be harder to calculate if you are self-employed as income tends to be less predictable and you may take earnings in different ways such as dividends or even opt to keep cash in the business.
What do mortgage lenders want to know?
Traditionally mortgage lenders would apply an income multiple on your earnings such as 4.5x salary to work out how much they will provide for a mortgage.
But since the Mortgage Market Review was introduced in 2014 the Financial Conduct Authority effectively took away self-certification loans, where the self-employed could benefit from just stating how much they earned and the bank multiplying that according to their criteria.
There are now stricter requirements with tough tests on how much you earn, how you spend your money and how that could change in the future. The banks want to see proof of every penny.
This can be harder if you are self-employed as lenders will seek different years of trading history and have varying views on how they treat dividends and retained profits.
Lenders are likely to want proof that what you earn in one year will be replicated the next, so you may need to provide contracts and ensure your invoices and files are organised.
How to beat the bank
Bigger lenders tend to use automated credit scoring so if you don’t exactly match their criteria it could be extremely difficult to get a home loan.
But there are lenders who can be more flexible in their criteria and others who will specialise in residential mortgages for the self-employed.
For example, Ian Walker, deputy head of private banking at Clydesdale Bank, says the lender uses flexible underwriting that doesn’t just stick to a set formula.
Typically, he says, the bank would want to work out your average earnings over three years.
If you are a sole trader it would want to see your net profit while for a limited company it would want to see three years of accounts and will work on a percentage of your pre-tax profits, depending on your shareholding.
The bank would also look at how much income is being taken and will consider both salary and dividends.
He has one extra little tip that may make it worth getting a mortgage with someone you already have a business account with, he says: “At Clydesdale there is the option for a commercial manager to be engaged.”
So having an existing relationship with the bank could boost your chances of success.
However, it is always worth shopping around, especially if you are newly self-employed as some lenders will take one or two years of accounts as long as they are signed off by an accountant.
Look beyond the high street
Don’t just rely on the banks on your high street, use comparison websites or find a regulated mortgage broker.
A broker could be beneficial for a sole trader or limited company as they may know banks most willing to lend so you don’t waste time and money on application fees. They may also know certain banks that will or won’t lend in particular sectors or those that will support newer businesses.
For example, specialist lenders such as Kent Reliance, Precise Mortgages and Kensington all offer home loans for those with under three years of trading history.
But you can only access these through a broker.
Get the finances right
Whether you use a broker or go direct, and are a limited company or sole trader, the one thing the lender will want is access to your figures.
The best way of impressing them at application is if your numbers are presented properly and you have a clear income stream. This is where an attentive accountant can be beneficial.
Most lenders will want self-employed applicants to have their returns signed off by an accountant, but you should also make sure the figures you are presenting are as good as they can be.
If you’re self-employed and thinking of becoming a home-owner, we can help plan ahead and get your accounts in order. We are full-service accountants in London offering tax and accounting support from bookkeeping to business plans, and payroll to tax-efficient investment advice.