When you’re self-employed, navigating the maze of financial decisions can seem a tad more complex than it does for those in regular employment. One area that often raises a multitude of questions, is the world of mortgages. If you’re self-employed and eyeing that new home, don’t fret. Let’s take a look into how being your own boss affects your journey to purchasing a property.
Professional Guidance: Consider a Mortgage Advisor or Broker
Mortgage Advisors are invaluable, especially for self-employed individuals. They not only understand the complexities of various lending criteria, but also have insights into which lenders are more receptive to self-employed applications.
Speaking with a mortgage advisor or broker could provide the solution, as they have access to the whole of the mortgage market and can guide you through the documentation required, ensuring you have the best chance of a successful application.
There are a variety of factors involved when self-employed individuals are applying for a mortgage, which can include:
Proof of Income: More Details, Please!
The most prominent difference in the mortgage application process for self-employed individuals is proving your income. Lenders want assurance that you have a consistent income to cover your monthly payments.
- For the Employed: Generally, a few recent payslips (usually the last three months) and possibly a P60 will suffice.
- For the Self-Employed: Lenders typically ask for at least two years of accounts, showing both your income and expenses. This often means presenting two years of tax calculations and tax year overviews if you complete a self-assessment tax return.
If you’ve been self-employed for a while, you should have heard of Tax Year Overviews and Tax Calculations. This is a summary from HMRC, which shows your yearly income and the tax you’ve paid. It’s a crucial information for many lenders. If you file your taxes online, you can obtain the information directly from the HMRC website; if you use an accountant, they’ll be able to provide it.
The Significance of Profit
When assessing affordability, lenders will look at:
- Sole Traders: Your net profit.
- Partnerships: Your share of the profit.
- Limited Companies: It’s a bit trickier. Lenders may consider your salary plus dividends or the director’s remuneration. Ensure you have clear accounts detailing your company’s performance and your personal drawings.
The Importance of a Healthy Credit Score
Whether you’re self-employed or not, a good credit score is essential. Lenders will assess your creditworthiness by looking at your borrowing history. If you’re just starting as a self-employed individual, it’s a great idea to check your credit score and ensure all is in order before approaching lenders.
Potential Challenges and How to Overcome Them
- Fluctuating Income: If your income varies from year to year, this can be a challenge. Some lenders may average out your earnings over two or three years, while others might consider only the latest year. If you’ve had a down year, it’s wise to explain why and provide evidence of consistent income previously.
- New to Being Self-Employed: If you’ve recently made the switch, you might find fewer lenders willing to take you on due to a shorter financial history. It’s often advised to wait until you have at least two years of accounts, but some lenders might consider one year if other factors, like your credit score and deposit, are robust.
- Larger Deposits: Sometimes, self-employed applicants may be asked for a bigger deposit. This is because lenders often perceive them as higher risk. A larger deposit can decrease this risk and increase your chances of approval.
Think Ahead and Prepare
- Keep Your Accounts Up to Date: Regularly update your financial records, ensuring you have evidence of your income and outgoings.
- Limit Personal Drawings: If you’re planning to apply for a mortgage, consider retaining more profit within your business. Lenders look favourably upon larger retained profits.
- Understand Deductibles: Be mindful of deducting too many expenses. While it’s legally acceptable and reduces your tax liability, it can also make it appear like you earn less than you actually do, affecting your mortgage application negatively.
In Conclusion
Being self-employed doesn’t close the doors to owning your dream home. It just means the process might look a little different, requiring more preparation and possibly some expert guidance, which HLC would be happy to help you with. But with determination, meticulous financial documentation, and the right support, you’ll soon be turning the key in the lock of your new abode.
If you’re self-employed and would like help with a mortgage application, contact one of our friendly team, who would be happy to have a chat and help guide you through the process.