What income do mortgage companies look at self-employed?

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What Income do Mortgage Companies look at for Self-Employed?

Proving your annual earnings is a crucial step for everyone in getting a mortgage – but for the self-employed it can involve a little added preparation. Understanding why this is so important is a good way to start getting ready to buy a home.

What counts as self-employed?

In a lender’s eyes, self-employed people own more than 20% of a business that delivers their main income. The business could be a limited company, a sole trader, a partnership or as a contracting company.

Why is proving your income so important?

Lenders use your income to calculate how much to lend you. So every mortgage company will want to understand how much you earn.

Because self-employed people have a more variable income than someone in a PAYE role, it can be more challenging for the lender to get a sense of your typical earnings. This is why they often want to see two or three years’ worth of business records, to work out your average income.

As part of the affordability assessment they will also request business and personal bank statements – and they will look at your credit score.

Proving your income as a Sole Trader

For sole traders, your business and personal income are seen as one and the same thing. The easiest way for lenders to understand your income is by looking at your most recent self-assessment forms (known in the past as SA302 forms).

Proving your income as a Company Director

Limited company directors often provide certified accounts for up to three years. Each year’s accounts should state your salary and dividend payments. You may also need to provide income tax records. 

The way lenders assess directors income can vary a lot – which can make a big difference if you pay yourself a low salary to keep tax down. While some mortgage providers will only look at your salary, others will accept retained profits in your business, which often means you can borrow more.

Proving your income as a Contractor

Today there are some mortgages specially tailored to people who work as contractors. These often will accept your day rate as the basis for your income, which is a good way to maximise your borrowing, as it looks at your gross income rather than post-tax profits.

For a contractor mortgage, you may need to prove you earn a consistent income, with details of current and previous contracts.

Do Self-Certified Mortgages still exist?

In the past, self-employed borrowers often relied on self-certification mortgages to buy a home. Applicants didn’t need any proof of income for these mortgage deals – they just signed to confirm their income.

The Financial Conduct Authority banned these mortgages, however, in the wake of the credit crunch. Lenders were made responsible for checking that self-employed mortgage applicants could comfortably afford their mortgage repayments.

What is the process to get a self-employed mortgage?

The mortgage process generally involves the same steps. First you should find out how much you could borrow and set your property budget, by using a mortgage calculator or talking to a broker.

Getting an Agreement in Principle from a lender tells vendors and estate agents that you are a credible buyer, which will help you get an offer accepted on a property.

After the vendor accepts your offer, you apply for the mortgage and provide all the documentation required. As long as you meet the mortgage criteria, including credit rating requirements, you should get approval.

Credit issues aren’t necessarily a barrier to a mortgage. A couple of late credit card payments or phone bills won’t affect your application much  – while CCJs or bankruptcy could disrupt your chances.

How do I improve my chances of my mortgage application being approved?

Mortgage approval is simply a case of meeting all your chosen lender’s criteria. A Mortgage Broker like Vivid Mortgages will only put you forward for a mortgage that will accept you, so we save you time, energy and protect you from disappointment.

We get to know your specific situation and compare products across both high street and specialist mortgage lenders to recommend suitable deals – and we support you right through the process. Call our registered office today for a free initial no-obligation consultation.

Vivid Mortgages are an appointed representative of Quilter Mortgage Planning Limited, which is authorised and regulated by the Financial Conduct Authority and registered in England and Wales.


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