At Private Premier Finance we deal with a large number of self employed clients and although it can be more complicated in some circumstances it is nothing to be feared. There are three ways that you can be classed as self employed from a lenders point of view and they are as a sole trader, a partnership, or a director of a limited company (with over a 25% shareholding generally).
The most important thing that differs from normal employed applicants is that the lenders will require a longer track record. You would need at least one years trading accounts, or one years SA302 (inland revenue document showing taxable income) so you can show sustainable earnings. Most lenders would require at least two years accounts but it is possible with just one years trading.
Below are some guidance tips on what a lender will look for with each of the classed of self employment:
The figure that will be used in the affordability calculations is taxable income / net profit. If you use a chartered account you will asked to provide your accounts and sometimes your SA302's. Most lenders would request the last two years figures and take an average to workout your income.
If the latest years net profit is lower than the previous year they may just take the latest year rather than an average as decreasing profits can be a concern.
If you submit your own tax return they would always ask for the SA302's to prove income. You would need to phone the inland revenue to request these and they can take a week or two to arrive so it best to do this as early in the process as possible.
As mentioned above there are a few lenders that will look at just one years figures but you wouldn't have as much choice of the most competitive products in this case.
Partnerships work very much in the same way as a sole trader. The accounts wil normally show your share of the net profit and this is the figure they will use. SA 302's are also often requested to backup these figures.
They will look for the same as a sole trader in terms of trading history and the number of years figures they need to see.
Limited companies can be more complicated because there are different types of income to consider. Although from the inland revenues point of view you are employed, if you own more than 25% (some lenders have slightly different criteria with the percentage owned) of the shares in the company they will treat you as self employed.
Most lenders will use salary and dividends as your income for affordability purposes. Bear in mind the net profit of the company must be able to support the amount of dividends taken over the period.
One of the issues that causes the most problems when directors come to apply for a new mortgage is you may not have taken much out of the company in dividends because you didn't need to. Sometimes it can be more tax efficient to leave funds in the company rather than draw them out, and accountants will often advise this.
This is where we would need to look at one of the lenders that will consider your share of the net profit of the company, together with any salary taken, and use that figure as your income. There are only a few lenders that will do this but it is a useful solution to a very common problem.
If you are self employed and need to discuss how to go about applying for a mortgage please contact us and we will offer our advice whatever situation you are in.
Your home may be repossessed if you do not keep up repayments on a mortgage.