Common issues for self-employed mortgage applicants

Self Employed? We list your common mortgage complications

be careful and get advice

be prudent and get advice

If you are in business and trying to obtain a mortgage, or thinking about a mortgage in the future, there are a number of potential pitfalls that it is well worth being aware of.

Here are our top eleven potential issues for the self employed mortgage applicant in today’s market.

1. New in business

Lenders will want to see a track record for the business when considering self-employed applicants. A few months of trading proves nothing. Most lenders will ask for two or three years trading figures.

We do have some mortgage options for particular circumstances for professional applicants or those with one year’s trading completed

2. Turnover is not income

By far the most common problem we encounter is applicants who quote turnover rather than profit as income. The ‘bankers mantra’ states – ‘turnover is vanity, profit is sanity, cash is reality ‘ – this says it all.

From your turnover must come all of your business costs –cost of sales, staff, rent, rates, light, heat, telephone – the list is endless. At the bottom of the page is the profit. That is the bit, you as the business owner can put towards buying a property (after you have paid tax of course).

3. Take it out or forget it

Some limited company directors have a habit of leaving profit in the business year on year. This is known as ‘retained profit’ and it builds up on the balance sheet. The majority of mortgage lenders are only interested in the wages you take from the business (PAYE), and the profit you take out (dividends).

This leads us on to…

4. Do you control the business?

If the business retains profit but you are not the majority shareholder you do not control that profit.

Own less than 25% and a lender may treat you as employed. Own 50%, with a business partner owning the other 50%? – you do not have control and the mortgage lender has a problem, unless it is your co-purchaser that owns the other 50%.

we do have mortgage lenders that will consider retained profit if you control the business

5. One swallow does not make a summer

Don’t quote one good year’s trading figures as your income. If your income is £33,000, £55,000 and £100,000 over 3 years, many lenders will work on an average £62,666.

A sudden increase in profit may make you feel good but does not cut ice with the lender. It is more likely to raise suspicion.

This leads us on to…

6. Profit changes

Does your profit vary wildly?

  • Have you had one major order that increased one year’s profit out of all proportion?
  • Have you lost a major client bringing your profit down in one year?
  • Was a key person sick or on maternity leave?

Fluctuating profit alarms lenders.

7. Company money is not your money

Is your deposit money sitting in your limited company account?

A lender may decide that company money is not your money – even if you are the majority shareholder.

Can the business continue to function properly with a hole in its working capital caused by your new property purchase?

8. Slow to submit

Lenders do not like your most recent trading figures to be too historical. If you are seeking a mortgage or re-mortgage, ensure trading accounts and tax returns have been submitted for any trading period that has ended within the past twelve months.

9. Not doing tax returns

We have seen limited company directors who receive PAYE only (no dividends) and as a result have not submitted self-assessment tax returns.

Your accountant may suggest you do not have to self-assess. HMRC expects you to, and so will most mortgage lenders.

No self-assessment means no SA302s

which leads us to..

10. SA302’s not available

Most mortgage lenders now ask the self-employed to provide SA302’s in all cases. SA302s usually take up to 14 days to arrive from HMRC. If you don’t have them, order them now so you have them available when they are needed.

If you don’t know what SA302s are, or how to get them, read our SA302 blog.

11. A or B is hard to see

Lenders generally have a problem with A/B share arrangements. Normally A and B shares have different voting rights. The difference will be set out in share agreements or the MAA (memorandum and articles of association) of the company.

The solution – independent mortgage advice

If you are self-employed and require a mortgage or re-mortgage, you need to use the services of an experienced independent mortgage adviser if you are:

  • A sole trader
  • In a Partnership
  • A limited company director
  • A member of a Limited Liability Partnership
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