Being Self-Employed comes with many benefits, especially the independence it provides. On the downside, Self-Employed applicants may find it challenging to secure a mortgage, given the uncertain nature of their employment. This has increasingly become the case after the credit crunch.
What are Self-Employed Mortgages?
Although commonly referred to as “Self-Employed Mortgages”, High Street Banks and Building Societies do not have a particular category of mortgage for the Self-Employed. Whether you are Employed or Self-Employed, the process of applying for a mortgage is the same, and so are the deals or the products offered by Mortgage Lenders.
Therefore, contrary to popular misconception, there are no “Self-Employed only” products. The only variable factors are the documentation involved in an application and the way each Lender assesses it. The criteria adopted by each Lender to evaluate a Self-Employed Mortgage application is unique to them.
Getting a Self-Employed Mortgage
It’s true that obtaining a Self-Employed mortgage can be tricky. Lenders perceive the nature of self-employment to be risky because of the lack of guaranteed continuity of employment.
However, with the right understanding of the Lender’s criteria, Self-Employed people can overcome these barriers. Matching an applicant with the right Lender is crucial.
What Documents are Required?
The documents required for mortgage applications for Self-Employed people are the same as for employed applicants, except for proof of income. Evidence of income required for Self-Employed people depends on the type of income that is used in the Lender’s affordability assessment.
If salary and dividends are used, then SA302s forms and tax overviews are required; if profits and salaries are used, then the annual accounts accompanied by the accountant’s certificate will be required. In both situations, the Lender will need to see business bank account statements to evidence the sustainability of revenue in the business.
In terms of the standard documents required, regardless of the type of employment the applicants are engaged in, expect to have to provide proof of identity, proof of address, and personal bank statements.
Self-Employed Mortgage Without Proof of Income
When it comes to Self-Employed applicants, some may struggle to collate the necessary documents to prove income. However, gone are the days when mortgages were granted without proof of income, as the Financial Conduct Authority banned self-certification mortgages in 2011. Therefore, all Lenders need to see sufficient evidence of income to ascertain whether a potential mortgagee can keep up with the mortgage repayments.
It is worth mentioning that a very few Lenders will consider instances where applicants do not have sufficient income or, indeed, have no income. However, this is not usually applicable to Buy-To-Let mortgage applications, as it is believed that such mortgages are self-funding. That is, mortgagees are assumed to meet the mortgage payments through the rental income received from the property.
Self-Certified Mortgages
These are mortgages where the applicant is not required to prove their income to the Mortgage Lender. High Street Banks and Building Societies assume that applicants are genuine and honest with regard to the declaration of their information. However, such mortgages are banned in the UK by the FCA. The reason is some applicants took advantage of self-certified mortgages and got themselves granted mortgages that they could not afford. Hence in 2011, these loans were prohibited, and now Mortgage Lenders need to see sufficient evidence of income and supplementary documents, and applicants are subjected to stricter assessment.
What is an SA302?
This is a document issued by HMRC that evidences an individual’s total earnings for the tax year under consideration. This will be made available upon submission of a self-assessment tax return. It is compulsory for Self-Employed people to file a tax return, and the SA302 will state all taxable income streams and the tax liability to HMRC. An SA302 is a vital document for Self-Employed applicants when submitting a mortgage application.
How Much Can You Borrow for a Self-Employed Mortgage?
High Street Banks and Building Societies consider many aspects when ascertaining the amount of mortgage to be granted to a mortgagee, including earned income, financial commitments, loan term, and the loan-to-value (LTV) ratio of the application; all these factors will affect the amount that could be borrowed against a property.
However, the tricky question for Self-Employed people when determining the amount that could be borrowed is how their income will be considered. All Lenders consider the salary and dividend figures on an SA302, but most Self-Employed applicants will find this insufficient to cover their mortgage requirements. However, some Lenders accept the profits and dividend figures appearing in the annual accounts which, in most cases, provide higher affordability to Self-Employed applicants.
Therefore, after ascertaining how income will be assessed, the affordability calculation will be carried out to arrive at the final affordability figure. This calculation will depend on each individual Mortgage Lender, and applicants might find this difficult as this is an exhaustive calculation after considering each Lender’s lending criteria. Hence consulting a Mortgage Broker will be a wise move.
As a mortgage is secured against your home, it could be repossessed if you do not keep up with the mortgage repayments
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