There are several tax advantages if you are self-employed. However, when it comes to applying for a mortgage, then self-employment can become a disadvantage because of the risks involved. One of the major risks of being self-employed is the fluctuation of your income. Mortgage underwriters see this as a sign of unaffordability.
To be considered as self-employed, you must own 20%-25% or more of a business which acts as your main source of income.
With this in mind, you can be a sole trader, a contractor, or a director of a limited company, as long as you run the business and take responsibility to the failures and success of the business.
Most UK lenders require self-employed applicants to provide at least two full years of accounts or tax returns to demonstrate a solid income. This typically entails presenting two years of signed individual federal tax returns, as well as other pertinent financial papers.
However, some lenders may accept only one year of accounting provided if you can demonstrate a strong financial history and consistent business income. This can be more complicated and require additional documents to demonstrate your company’s viability.
Contractors can sometimes receive a mortgage with only 12 months of accounts, but lenders often prefer two to three years of accounts.
Before providing further information about how to get your first mortgage, it is worth understanding the basic principle of lending. One of the main concerns of borrowing or financing is the risk and returns. In a nutshell, it means the higher the risk you take the higher returns you can expect. The majority of UK banks reverse this theory in order to earn more profit by lowering the risks and expect higher returns from the interests. Therefore, if you are self-employed then the risk is high for the bankers and the underwriters perform extra due deference checks if you are self-employed. The mortgage application rejection rate is higher for self-employed individuals.
Always remember buying a house on mortgage means extra liability although you have acquired the house as an asset. However, it is beneficial to pay your mortgage than to pay your rent. Most of the people in the UK benefitted when the house price goes up.
The amount that can be offered, and how it is calculated, is dependent upon the lender themselves. This is why we encourage looking around different lenders to find the best deal.
For a sole trader, the net profits of your business prove your earnings as these belong to you. Ultimately, you will need to show lenders your income for the past two to three years to calculate your average income.
Similarly, if you are a contractor where money is taken from your payslips for tax and national insurance, lenders will analyse your application through the same process as sole traders. With this in mind, you will need payslips for the previous six months.
If you own a limited company, lenders will look at your salary and dividend payments for the past two to three years. Alternatively, if you are part of a business partnership, lenders will only need evidence of your share of profits.
Given that you are able to supply the necessary information regarding your income, you should qualify for the same mortgage deal as someone with a permanent, full-time job.
The mortgage rate you will be offered is dependent on your credit rating, along with the size of your deposit. The larger the deposit you can put down as a deposit, the better your mortgage rate is likely to be.
However, if you do not get accepted by a mainstream bank, you have the option to apply to specialist lenders with self-employed borrowers, but the rates might be higher.
There are a few steps you can follow to boost your chances of getting accepted for a mortgage if you are self-employed. These include:
As well looking into the evidence of your income, lenders are also interested in examining your bank statements to see your spending habits, how much you spend on bills, and other costs that show you can afford to repay the mortgage.
The things they also take into consideration to determine whether to approve your mortgage request include:
As a professional accounting firm specialising in self-employed accounting, including contractor accounting, sole trader accounting and limited company accounting, Tax Care Accountants know the ins and outs of running self-employed accounts. Speak to one of our accountants today for assistance and/or advice on getting your accounts together in preparation for a mortgage application.
Call us on +44 (0)1213681277 today or email info@taxcare.org.uk
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