Gone are the days when self-employed people could simply state their earnings for a mortgage application. After many people abused this system in order to buy more expensive properties, the Mortgage Market Review put an end to self-certify mortgages.
The self-employed now need to prove their income in order to be accepted for a mortgage. It might seem like a headache, but it doesn’t have to be complicated. If you’re self-employed and dreaming of getting on the property ladder, read on to find out how to prove your income to your mortgage provider.
Who needs to prove their income?
It doesn’t matter if you’re a sole trader or a limited company, you will still need to prove your income to a mortgage provider. It might seem unfair, but the owner of a company would have a harder time getting a mortgage than the people they employ. If you’re not sure if you’re classed as self-employed, consider this one question. Are you responsible for your own tax? If the answer is yes, you’ll need to prove your income.
What kind of proof is accepted?
This will vary depending on the individual lender. In most cases, you will need to submit your SA302 tax calculation. This is a document you receive after submitting your tax return which outlines your income for the entire tax year.
Having an accountant will strengthen your application. You may even be able to apply with fewer year’s of accounts, as the accountant can act as a guarantee that your accounts are accurate. Where many lenders will ask for at least one year of accounts, this can be problematic if you started your self-employment in the middle of a tax year. An accountant will be able to verify this income and even offer income projections.
Some lenders will also accept other types of proof. For example, if you only recently changed to self-employed status, you might be able to submit past pay slips as proof of income. This will usually only be the case if you are still doing the same job, but you’re now considered self-employed. An example of this would be an employee switching to a contractor status in order to increase their earnings.
And finally, you may be able to provide future contracts or details of retainer contracts in order to give evidence of future earning potential. This will all vary depending on the mortgage provider you are working with. If you aren’t sure what is accepted and what is required, always speak to a specialist mortgage broker.
How many year’s of accounts do I need?
This will vary depending on the lender. Some lenders will ask for three years of self-employed accounts. Some will ask for two years and some will only ask for one year. In rare cases, you may also be able to provide just 9 months of accounts if you have an accountant.
If you are worried that you don’t have enough accounting history, it’s worth shopping around. Not all lenders treat self-employed people in the same way. While some high street lenders might be wary of lending to the self-employed, others are far more progressive. With 4.7 million people identifying as self-employed in the UK in 2017, it’s clearly an important demographic that lenders need to be willing to cater to.
What if I’m a director of a limited company?
It becomes more complicated when you are the director of a limited company. This is because your income is more irregular than that of a sole trader. A sole trader’s income can easily be calculated by taking their expenses away from their total income. With a limited company director, you may have a salary, dividends and retained profit. You need to work with a specialist mortgage provider that understands the value of these different income sources.
What if I am rejected?
If you are rejected by one mortgage provider, don’t be disheartened. Some mortgage providers are less likely than others to accept applications from self-employed individuals. It’s important that you shop around and consider all of your options. Just because one lender has turned you down, it rarely means that all lenders will turn you down. You simply need to speak to a specialist who understands your unique situation.