If you’re self employed, this step by step guide will walk you through everything you need to know about applying for a mortgage and help you avoid the pitfalls along the way.
1. Maximise your income
Before you even begin to look for lenders, you need to make sure that your income in the most recent year of trading is as high as it possibly could be. Naturally, as a self employed person, you might be used to writing off as many allowable expenses as you possibly can – but for the purpose of applying for a mortgage, you need to show that you’re earning as much as possible. This may mean taking a hit on what expenses you write off the year before you apply.
2. Get your accounts in good shape
If you’ve already got three years of accounts prepared by a suitably qualified accountant, great. You shouldn’t have too much difficulty obtaining a mortgage, provided that there are no sudden drops in your profit. If, however, you tend to do your own book keeping and submit tax returns yourself, this can make things more difficult. Having accounts prepared by an accountant for as many years as possible will give you more choice of lender, but there are some lenders that are willing to consider you if you only have a year of accounts, or you only have SA302s. Just be aware that with a limited choice of lenders, you may find that you can’t get the best deals available.
The best thing to do is to start shopping around now, take a look at the lenders you’re interested in and what their requirements are.
What is an SA302?
An SA302 shows your tax calculation for a particular tax year. This will include how much income you declared, and how much tax was due on the income.
You can print off your SA302, together with a tax year overview, if you do your Self Assessment tax return online.
As long as you filed your return online, you can print:
- an SA302 for tax years 2012 to 2013 and 2013 to 2014 (and one for 2014 to 2015 after you’ve filed your return at the end of the tax year)
- a tax year overview for each of the 4 tax years between 6 April 2010 and 5 April 2014
How to print your SA302 and tax year overview
To print your SA302 and tax year overview, log in to your online Self Assessment account on the HMRC website and follow the ‘at a glance’ link. You’ll see instructions for printing both documents under ‘Important information’.
If you see the ‘Your Tax Account’ page after you log in, follow the link to the ‘Self Assessment overview’ to see these options.
You will need to contact HMRC for your SA302s if:
- You don’t send your tax returns online – i.e. you send them by post, or
- Your mortgage lender won’t accept documents you printed yourself.
It’s worth asking HMRC for paper copies just in case, a couple of weeks before you intend to apply for your mortgage. They can take at least two weeks to come so you might as well have them ready, to avoid unnecessary delays.
Call them on 0300 200 3300. You’ll need your basic personal information along with your UTR (10 digit Unique Tax Reference) and National Insurance Number.
You can find out more information on the Government’s Self Assessment help pages.
3. Save a good deposit
Your deposit determines your LTV (loan-to-value) ratio. The bigger your deposit, the lower your LTV. A lower LTV is less risky for the bank.
For instance, if you borrow £130,000 to purchase a house worth £150,000, the LTV ratio is £130,000 to £150,000 or £130,000 divided by £150,000 – in other words, 87%. If your LTV is more than 90%, you’ll often find the requirements for proof of income are more stringent. You’ll also find the mortgage rates aren’t as good.
It therefore makes sense to have a deposit of at least 10%, so that the proof of income requirements aren’t as stringent and you get the best deals.
4. Look at Help to Buy
The Help to Buy scheme can help you improve your prospects of getting a good mortgage deal and for some lenders, it will mean you don’t need three years of accounts made up by an accountant. The reason is that the Help to Buy Scheme makes lending to you less risky for lenders. There are two versions of the scheme:
- Help to Buy Equity Loan – the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home. This scheme is available for new build homes only.
- Help to Buy Mortgage Guarantee – a mortgage supported by the Help to Buy: mortgage guarantee scheme works in exactly the same way as any other mortgage except that under the scheme the Government offers lenders the option to purchase a guarantee on mortgage loans. Because of this support, lenders taking part are able to offer home buyers more high-loan-to-value mortgages (80-95%). This scheme is available for both old and new homes.
The Help to Buy website has details of both schemes, including eligibility criteria.
5. Do look at different lenders
Although most of us will look first at the bank we’ve been with for years, the self employed really need to shop around. You’ll be surprised how much variety there is in the way that different lenders calculate affordability. Some look at the profits of your business, taking an average over two or three years. Others will look at the most recent year. These differences can mean that while one lender says no, others will say yes.
If you’re a director of a limited company, there might be profits that you have choosen to retain in the business, rather than take out as salary or dividends. Some mortgage lenders consider retained profits when assessing an application, but others won’t.
If you’re a partner, you’ll find most lenders will treat you much the same way as a regular self-employed borrowers. They will typically look at your share of net profit when calculating how much you can borrow.
“Some lenders look at salary plus dividends when assessing income of limited companies, whilst others, such as Clydesdale, may look at the net profit of the business, which can prove more favourable for an applicant. Certain lenders may be more pragmatic in their approach to a limited company that is sheltering profits, whereas others take a tougher view.”
Using a specialist mortgage broker can save you a lot of time. They will know each lender’s requirements and be able to match you up with the lender that is most likely to accept the documentation you have. Your mortgage broker will also be able to tell you which lenders take retained profits into account, if this is an issue that is likely to affect you. What you don’t want to do is apply to a lot of different lenders yourself, leaving footprints all over your credit file. This could jeopardise your chances of getting a mortgage, as lenders don’t like to see too many different applications for credit. Since brokers will only put you forward to lenders they are relatively confident will accept you, using a broker avoids this risk.
Which mortgage lender should I try?
Precise Mortgages are definitely worth a try if you don’t have a solid three years of trading history or certified accounts – they accept just one year of accounts or an SA302 in lieu of accounts:
Kensington similarly accept just one year of accounts from self employed people. Be aware that you’ll need to go through a mortgage broker to apply to either of these lenders. Both work with London and Country Mortgages.
Is my mortgage broker impartial?
Some mortgage brokers charge a fee for their services – others don’t. Don’t instantly dismiss those that charge a fee but DO ask the broker what value they will bring you for the fee they are charging. For example, brokers who charge a fee may be able to tell you about lender direct deals or have exclusive deals that you won’t find elsewhere on the market.
Similarly, don’t rule out a broker just because they DON’T charge a fee – but do be aware that while they may still have access to exclusive deals, they may be less likely to tell you about lenders’ direct deals. Brokers who don’t charge an upfront fee will typically be paid by commission from the lender instead.
London & Country is one broker that DOESN’T charge a fee. They told This Is Money:
“We receive a commission from the lender and this is disclosed to the customer in a Key Facts Illustration that they get before they apply for any mortgage deal. This doesn’t affect the advice we give. Unlike with investments, normal mortgage commissions are fairly standard across the board anyway.We don’t have a limited panel of lenders and all customers will get advice from the whole market. There are a few lenders that won’t deal with any intermediaries and we make this clear to customers at the outset.”
6. Be ready to explain fluctuations
If your income from self employment has gone up or down over the past two or three years, your prospective lenders will want a good explanation. This can be a major stumbling block, so be ready.
7. Tax credits and benefits are relevant
You might be surprised to learn that a number of mortgage companies do take tax credits and child benefit into account when calculating how much they are willing to lend you. These will want to see that you have a good primary source of income – applications where income is made up primarily of benefits and maintenance are likely to be declined – but the tax credits and benefits can increase the amount you are able to borrow. Most lenders who take tax credits into account will look at how long you’re likely to be entitled to them. For example, if you have one child who is 18 and in full time education, you’ll only be entitled to tax credits for a short while longer. Lenders typically look to see if you’ll be entitled for at least 3 years, for the income to count. Some lenders don’t multiply your benefits income the same way as they multiply your earned income – they use a smaller multiplier.
Nationwide are one example of a lender that takes into account a range of benefits including:
- Child Benefit (accepted provided neither applicant’s total income is greater than £50,000.
- Working and/or Child Tax Credits.
- Most disability benefits.
Benefits such as Jobseeker’s Allowance, Housing Benefit and Income Support are not taken into account.
The Halifax also take tax credits and other income (e.g. overtime, bonuses, commission, child maintenance, child benefits) into account.
It’s very important if you receive benefits that you have a complete copy of your award letter, including any blank pages.
8. Don’t change your company type
If you’re considering switching company type (for example, from sole trader to limited company) prior to applying for a mortgage, hold back as this could hinder your application. Sole traders and Limited Companies are assessed differently, and your newly formed limited company will have no profits to be taken into account!
9. Keep your credit record squeaky clean
Your credit history will have a big impact on your mortgage application – on being accepted, on the rates you’re offered and on the amount you’ll be able to borrow.
In one example sent to brokers, a borrower with a low credit score was told they could borrow £130,600, a medium score might secure £148,725 and high scorers could get £158,738.
Although some lenders – Precise for example (mentioned above) – will accept a limited number of defaults and CCJs on your credit history, borrowers with a good credit history will enjoy the best rates. Try and keep on top of your payments in the 18 month run up to your application.
10. Your deposit is more important than your debt
Although lenders are obsessed with affordability right now, having a bigger deposit carries more weight than having no debts. Debts are not a problem if you keep up with the payments and can afford them on top of your mortgage payment. Concentrate on building a bigger deposit, rather than paying your debts off – it reduces your LTV rate and therefore makes you a less risky prospect.
11. If you’re a contractor, don’t wait
Contractors are frequently treated a little differently from self employed people, provided that they can show they have a contract in place which guarantees them revenue for a number of years. It doesn’t matter if you signed the contract yesterday – you’ll still find that lenders are willing to consider you with that contract in your hand, so don’t hold back on your application.
12. Be ready for the stress test
Following the Mortgage Review, lenders now need to assess whether you’d still be able to afford your mortgage repayments if interest rates went up to as much as 6.99%. This is just something to be aware of when working out how much income you’ll need to show for the sum you want to borrow.
13. Reduce your outgoings
Since the Mortgage Review, lenders have been obliged to ask much more intrusive questions about your outgoings. This includes things like food bills, phone bills, school bills and maintenance payments. It’s advisable to reduce the amount you spend in the year before you apply as much as possible.
14. Make sure you’re on the electoral roll
Being on the electoral roll affects your credit rating so make sure you’re registered to vote for as long as possible before you make your application. You can register online on the Government’s Register to Vote pages.