Mortgage lenders' income requirements for the self-employed

If you’re self-employed or the director of your own business, it can be challenging to understand the requirements that mortgage lenders will need. Jeni explains more here.

Mortgages for self-employed borrowers are often perceived to be harder to come by, or subject to additional requirements. The reality is that this is not the case. The only thing that can be confusing is what actually counts 'income' as some lenders differ on this point.

Can I get a mortgage if I am self-employed?

Yes! Lenders typically require you to have one to two years of accounts to demonstrate your income, but fundamentally lenders are comfortable lending to self-employed applicants.

What are the income requirements for self-employed mortgages?

It can be confusing as to what actually counts as self-employed 'income' as some lenders differ on this point. Let’s look at the following types of income:

For a sole trader

Income is the net taxable income as per the amount indicated on an SA302 form from HM Customs & Excise (see bottom of this article for a definition of an SA302).

Generally speaking, mortgage lenders will work on either:

  • The average of the last two years' SA302s, if the most recent figure is higher
  • The most recent year's figure

A handful of lenders work on an average of the last three years' SA302s.

For company directors

Some lenders work on salary plus dividends using the same principle as above, and a few will use salary plus share of net profit, which for those company directors who choose to leave profit in the business, can be a more favourable calculation.

Working with mortgage lenders on daily basis, I've found that Virgin, Clydesdale, Kensington, Woolwich, the Halifax and the Coventry work well for self-employed borrowers, but obviously there are more options available and we aim to match the right lender to each client's specific needs.

Turnover is not income!

Some borrowers get slightly confused believing that their turnover is their income, but lenders will not accept this! It's all about the taxable income i.e. profit.

Very few lenders will lend to someone with less than two years' figures, so if you are in this situation do get in touch to chat through the options.

If you do have two years' worth of figures and are looking for a mortgage, you can save time by getting your SA302s ready before submitting an application. Again, do get in touch if you need help.

What is an SA302?

It is a statement of your tax calculator from HMRC. It provides mortgage lenders with evidence of your earnings and how much tax you owe. You can only get one if you've filed your self-assessment tax return.

You get an SA302 for the last four years of your earnings. Most people download their SA302 from their HMRC online account but you can request HMRC to send them to you although this can take up to two weeks to arrive.

Most lenders will accept either:

  • The SA302 as provided by HMRC (either by post or one you have printed from your HMRC online account).
  • A tax calculation printed from commercial software which has been used to submit returns (most likely by your accountant).

For more information on SA302 visit the SA302 tax calculation page on Gov.uk

 

What if I have a poor credit rating?

As with PAYE employed applicants, having a poor credit rating can make getting a mortgage more challenging. As the range of ‘black marks’ on a credit report can vary in severity, it’s best to take your credit file to a mortgage broker so they can fully understand the circumstances and advise accordingly. Some lenders are understanding of minor, historical issues, so you don’t necessarily have to write off your chances of getting a mortgage.

Can I still get a self-certification mortgage?

No. Self-certified mortgages stopped being available back in 2009 as a direct result of the financial crash. Not only does this protect lenders, it prevents borrowers from taking on debts they cannot repay and getting into financial difficulties.

Which lenders offer self-employed people mortgages?

All of them! As long as your income meets a lender’s affordability calculations, you shouldn’t have a problem.

How is a self-employed mortgage calculated?

Buy to let mortgages for self-employed are calculated the same as if you receive a PAYE income. Some lenders have a minimum income requirement (usually £25,000 but it varies), and some just require that you have an income. Affordability is calculated based on the potential rental income of the property. The monthly rent should be enough to cover the cost of the mortgage, plus 20-30% extra as a contingency.

Getting a mortgage for your own home when self-employed is slightly different than for PAYE applicants. Typically, lenders will take a two-year average of your taxable income (some may only need one years’ worth) and apply a usual x4/4.5 income multiple calculation. For company owners with a majority shareholding, some lenders will consider the share of net profits.

How can I apply for a self-employment mortgage?

The mortgage application process is the same for self-employed and PAYE income applicants. The only additional documentation you will need are your tax returns and SA302, so it’s good to have these ready before you complete a mortgage application form. Besides that, the following steps are the same:

  1. Speak with a mortgage broker about the budget and/or property you have in mind. You’ll need to complete a fact find covering all your financial information. Once this is returned, your broker can begin researching suitable mortgages for you.
  2. You and your broker will then discuss the mortgage options available to you, and decide on the most suitable product. Your broker will then apply for a Decision/Agreement in Principle (DIP/AIP) from the chosen lender. DIPs are a ‘soft’ application that allow lenders to check whether your basic financial information meets their criteria. You may need to provide some additional documentation at this point.
  3. Once a DIP is agreed, your broker can complete the full mortgage application! A valuation is instructed on the property in question to check that it is worth what you’re proposing to pay for it.
  4. If all is well with the valuation, the lender will continue to underwrite your mortgage. If there is an issue with the valuation, your broker will work to find an alternative solution.
  5. Assuming all is well with the valuation and the underwriting complete, you will now get a formal mortgage offer outlining the full terms and conditions of the loan. If you’re happy with these terms, it’s time to instruct your solicitor.
  6. Once the legal elements of the process are complete, you’ll agree a date of exchange. If you’re purchasing, this is when you’ll need to pay the deposit money. For remortgages, your solicitor will request the funds from the lender.
  7. Once exchanged, you are legally responsible for the property. You can now arrange a day for completion and should arrange any necessary buildings insurance policies in this time.
  8. Completion! You are now the legal owner and can get the keys.

 

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. 

 

You might also be interested in:

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Residential mortgages for self-employed

Six common misconceptions about Buy to Let Mortgages and Ltd Companies 

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NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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