A comprehensive guide to self-employed mortgages
Obtaining a mortgage can be a complex process for anyone, but it often presents unique challenges and considerations for self-employed individuals. The traditional expectation of presenting three years’ worth of accounts for a mortgage application has evolved, with many lenders now accepting as little as one year of self-employed income documentation. This article delves into the intricacies of self-employed mortgages, with a particular focus on sole traders, shedding light on how lenders evaluate different categories of self-employment and providing insights on how a Mortgage Expert can guide applicants towards the right mortgage deal.
Understanding self-employed mortgages
Being self-employed has various advantages, such as flexibility and control over one’s work. However, when it comes to securing a mortgage, the process can be daunting, which is why finding help from sites like Mortgage Refused can be of great assistance. Historically, lenders demanded a substantial financial track record of three years for mortgage consideration. Over time, this requirement has become more flexible, with lenders often accepting two years of accounts or, in some cases, just one year’s worth of self-employed income evidence.
Sole traders: The most common self-employed category
Sole traders represent one of the most prevalent categories of self-employed individuals. They typically hold 100% ownership of their business and are personally responsible for any business-related debt. Common occupations within this category include builders, painters & decorators, market traders, electricians, and individuals running various small businesses. Unlike other business structures, sole traders are not obligated to use an accountant to manage their tax returns and financial records, although doing so is advisable.
Lenders often evaluate a sole trader’s earnings using the SA302 Tax calculation, accessible from their HMRC self-assessment account. This document needs to be accompanied by a Tax Year Overview to verify the proper submission of the self-assessment. Some lenders may also request a self-employed reference or certificate from a qualified accountant and three months’ worth of bank statements to support the income provided. Understanding the tax year cycle and its impact on mortgage calculations is vital, especially considering the challenges in assessing self-employed income over an entire year compared to PAYE employment.
Challenges and considerations for sole traders
When applying for a mortgage, sole traders face specific challenges due to the nature of their income calculations. Lenders typically evaluate self-employed income over a two-year accounting period, averaging the earnings or considering the lower figure in case of minor decreases. However, a significant income decrease can pose difficulties in the approval process unless there is a verifiable reason for the decline.
Getting a mortgage approval becomes more complicated but not impossible for those with less than two years of accounts. Lenders prioritise stability and assess the risk associated with the business when considering income from a self-employed individual. While most lenders prefer a minimum of two years of accounts, some are open to considering mortgage applications with just one year’s worth of accounts. However, this could potentially lead to slightly higher interest rates or a larger deposit to mitigate the perceived risk during the underwriting process.
The importance of mortgage expertise for self-employed individuals
Navigating the realm of self-employed mortgages necessitates a profound understanding of the intricacies involved. Seeking guidance from a Mortgage Expert who specialises in assisting self-employed individuals can be invaluable. A proficient Mortgage Expert can provide tailored advice, explore suitable mortgage options, and help applicants compile the necessary documentation to enhance their chances of a successful mortgage application.
How to secure a mortgage
Securing a mortgage as a self-employed individual requires a strategic approach and a thorough understanding of how lenders assess different categories of self-employment. Sole traders, being a common self-employed category, face unique challenges related to income calculation and stability evaluation. While meeting traditional mortgage criteria can be more demanding for self-employed individuals, the expertise of a Mortgage Expert can significantly ease the process and help prospective homeowners find the right mortgage deal tailored to their circumstances.
