Self Employed

There are 4.5 million self employed people in the UK. Lending is improving, but you are still dealing with strict underwriting and limited lending options compared to your PAYE colleagues.

Mortgages for the self employed borrowers

In today’s mortgage market, how much you can borrow is solely down to your declared income and overall affordability. The lender will require proof of your income, which is typically your last three years’ tax returns or business trading accounts. Unfortunately, there are no lenders offering self certification mortgages. In addition, proof of income is not income and expenditure on bank statements but income that you have declared to HMRC.

Typically, lenders will request your last three years’ trading figures and they will work off the average to determine how much they can lend you. Most importantly, lenders expect to see increasing net profit figures year after year.

For example:

2014 net profit figures, £49,000

2013 net profit figures, £43,000

2012 net profit figures, £40,000

This is the standard borrower profile that lenders want, and if your income and circumstances fits within their computer based lending model, your mortgage will get approved. In reality, self employed borrowers have variable, non standard and complex income arrangements that are not compatible with the majority of these computer systems and as a result you get turned down for mortgages. Non standard could be that:

Your latest accounts shows decreasing net profits.

Your last three years figures show fluctuating net profits: down this year, up last year.

You may just have one year’s accounts.

You may have taken a low salary but you have retained profits in the business.

You may have been trading as a sole trader for three years and now set up as a Ltd company.

You may have been PAYE for a number of years and have just gone self employed.

Your latest figures show a significant increase in comparison to the last two previous years.

The additional conundrum is that you’ve got your accountant, who invariably tries to mitigate your tax liability, resulting in your ‘’income’’ not being high enough to buy your property of choice. You win on the tax side but lose on the property front.

The good news is that although three years trading accounts is the norm, there are lenders that will consider two years’ and some might even accept one year’s trading figures. Unfortunately, it’s not a simple case of saying this lender accepts one year’s accounts and this one doesn’t. Every single mortgage case is different: type of profession, nature of self employment, loan to value, loan amount, the deposit amount, credit score and years of experience. There is a huge mix of variables that can determine why a lender may forgo three years’ for just one year’s set of accounts.

The last thing I want to do is present a lender as having relaxed underwriting criteria compared to their competitors.

If you’re self employed with non standard income and you want access to the widest choice of mortgage options, then your best bet is with an independent whole of market mortgage broker.

The main benefit of using an experienced independent mortgage broker

The broker analyses your accounts and understands the reason for any anomalies in your figures. They consider the best lender to approach based on your circumstances: Is it best to go down a salary and dividends route or would you be better off using net profit and salary? If it’s a decent loan to value, would just using the latest account work? Maybe you’re a contractor working through a limited company as opposed to using your company trading accounts— perhaps a better option is to approach a lender who will accept lending based on your contracted daily rate. It’s about presenting the positives to the right lender.

The real clincher as to why you should use a broker is that they can speak directly to an underwriter about your case. An underwriter is the person at the bank that reviews your mortgage application and decides whether you are going to be a risky borrower. Underwriters make the final decision as to whether to approve or decline your mortgage application.

Your broker goes behind the scenes to discuss your mortgage application with an underwriter first and foremost to ascertain if your mortgage application has potential. They only submit the application once the underwriter has given an informal approval that they will consider lending to you subject to passing their credit check. Once your case is submitted, there should be no hiccups along the way as the issues that could potentially kick the case out of bed have been explained to the underwriter from the outset. This is the unique selling proposition of using an experienced mortgage broker.

Brokers have built up relationships with all the lenders and they are able to get cases agreed that don’t quite fit standard criteria. If the underwriter says it’s outside their criteria, then it’s not the end of the world as your broker simply approaches another underwriter at another bank. The additional benefit of this approach is that no credit checks or footprints are left on your credit file; therefore, your credit is not impaired as you’ve circumvented the computer process.

In case you’re thinking that you’ll get a mortgage but on a higher rate compared to the norm, then you are wrong. In reality, depending on your circumstances, it could actually be with one of the high street lenders. Mortgage brokers (and banks too) are bound by Treating Customers Fairly (TCF). You always approach the lenders with the best possible rates first and if they won’t do it, then you work your way down the list. Otherwise, they will have their compliance department on their backs demanding an explanation as to why they declined to proceed with a cheaper option. And if they can’t justify it they get fined! Too many fines and you’re out of a job.

Mortgage advisors are bound by the regulator to give suitable advice in all instances and this involves always seeking to obtain the best deal possible. Naturally, you’ve got to find the right broker that lives and breathes these principles and applies strong ethics.

In case you’re worrying (needlessly) about your low credit score with Experian/Equifax, then you need to be aware that some niche lenders do not credit score but adopt a lateral thinking case by case approach to mortgage lending. They will still conduct a credit check to confirm your address history and that no adverse credit is recorded against you, but they do not operate a credit score system that says you need to get 600 points out of 1000. Provided your circumstances make sense to the underwriter and there is a sound explanation for the temporary dip in profits in your latest accounts or whatever the anomaly, then they will lend with equally competitive rates that match some of the high street banks.

By all means, try your bank in the first instance but if they say no or agree to lend you an amount that can only buy you a shoe box, then don’t despair as there could be alternative lenders.

Documents required by the broker to determine how much you can borrow:

If you are sole trader, all lenders now require your last three years’ SA302.

The SA302 form can be requested from HMRC. The form provides a summary of your total income in a particular tax year and how much tax is due. From the lender’s perspective, your SA302 form represents conclusive evidence of your income.

The HMRC contact number is: 0845 900 0444. You will need to provide your full name, date of birth, current address, and your 10 digit tax code. Unfortunately, it is a busy line so expect a delay. It can take up to 10 days for the SA302s to arrive so request for them in advance of your mortgage application. If you tell them you are applying for a mortgage and the lender needs to see them ASAP, they can fax it to you. Send the fax to your mortgage adviser, who will be able to work off the faxed copy until the originals arrive in the post. They must still post the original SA302 forms as they need to be seen and certified by your mortgage advisor.

It’s simple: No SA302s, no mortgage.

Self employed Contractors: Three years of company trading accounts is the norm. If you haven’t been trading for three years, then send what you have.

If you are currently contracting, then we’ll need to have a copy of your current contract and any previous contracts, going back two years ideally. Some lenders work off your daily rates as opposed to requesting your last three years’ trading accounts. For example: If you are an IT contractor or financial services contractor on £350 per day, then you could borrow:

£350 x 5 days = £1750 x 46 weeks employment = £80,500 x lenders income multiple

If the lenders income multiple is four times. Then its 4 x £80,500 = £322,000

If 4.25 x £80,500 = £342,125

If 4.5 x £80,500 = £362,250

An up to date copy of your CV is incredibly useful in order to demonstrate to the lender that you have been in continuous employment and eliminates that underlying perception of you being a risky borrower. Having the odd two to three week break in between contracts is ok. It’s all about presenting you as the safest self employed borrower in the United Kingdom.

Director of a limited company: If you are the main director with a shareholding of more than 20%, the lender will classify you as self employed. Again, your last three years trading figures will be required to determine how much you can borrow.

The typical scenario is that you have been advised by your accountant for tax efficiency purposes to pay yourself a low basic salary and receive the bulk of your income via dividends. To know how much you can borrow, add your salary + dividends.

For example: In 2014, you paid yourself a salary of £7000 and you received a dividend of £40,000. Therefore, income is £7000 + £40,000 = £47,000.

The lender will work on the average of the last three years’ figures, so you need to supply 2013 and 2012. Lenders will work off your average last three years’ figures and they expect your last to three years’ figures to show a yearly increasing trend.

Alternatively, some lenders use your last two or three years’ net profit figures plus director’s salary to determine how much you can borrow.

Some lenders will accept a reference letter from your accountant (accountant’s certificate) confirming your trading figures. They will only accept references from professionally qualified accountants, chartered certified accountant, e.g., ACCA, ACA, etc. They won’t accept a reference from a book keeper. Your broker will be able to confirm which professional body is acceptable to the lender.

Partnerships: The lender will need to see your last three years’ partnership accounts. If you happen to work for a large firm of accountants or solicitors, then a letter from the senior partner of the firm or finance director confirming your total remuneration for the last two years is normally sufficient. Alternatively, SA302s will be required.

The bottom line is that the onus is on you or your accountant to get your numbers over to your mortgage broker . The sooner they get the numbers and an explanation (if necessary) for any anomalies, then the sooner you’ll find out whether you can obtain a mortgage.

 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.

 

 

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