In the dim and distant past (pre-2008) mortgages for the self employed, and especially the sole trader or partnership, were offered without too many questions asked. Little supporting information was required by the lenders and a self-employed person could, in many instances, simply provide an estimate of their annual profits in support of a loan application.
After the Credit Crunch in 2008 banks became much more cautious when lending money, in no small part because the UK Government clamped down on irresponsible lending which might result in borrowers being unable to meet monthly payments because their income was less than they said it was or because of a change in circumstances. Loans made on this ‘non-status’ basis were rather uncharitably christened by the press as ‘Liar Loans’.
Because of these changes, anyone that is self employed will usually be required to supply either three years audited accounts or an SA302 from the ‘taxman’ at the HMRC. An SA302 is a document issued by HMRC that proves your income based upon previous tax returns.
Most mortgage lenders define the self employed as either sole traders, partners or directors of a limited liability company. Definitions do vary.
The two largest practical problems for the self employed person looking to secure a mortgage are;
1. Most business owners do all they can do legally to show the lowest possible annual profit so as to limit their tax liability and
2. Most owners of limited liability companies will try to retain cash flow in their businesses so as to benefit from relatively lower rates of Corporation Tax.
Both these tactics might serve to reduce the real profit a business owner has available to him or her when a lender is calculating how much they will lend using their prescribed multiplier and when applying their affordability criteria.
Due to the more complex nature of the self employed mortgage applicants, different lenders apply different criteria to assessing their income. Some mortgage lenders will only look at new profit, some will take a view on profit remaining in the business and others will treat some self employed people with regular contracts as if they are employed.
It is therefore imperative that you take proper advice before making unfruitful applications to unsuitable lenders which might leave hard footprints on your credit history and further reduce your overall credit worthiness.
If you are self employed and looking for a mortgage or secured loan contact Mortgage Required in Maidenhead for an initial, no-obligation conversation.
To speak to a specialist advisor about self employed mortgages, contact us on 01628 507477 for a chat with no obligation.
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