Since 2001, the number of people who are self-employed has increased from 3.3 million to 4.8 million. Being your own boss and taking charge of a business can be extremely rewarding. However, there is an outlook that self-employed people will struggle more to obtain a mortgage. Self-employed people are entitled to the same rates as anyone else. However, almost a third of self-employed homeowners believe that the mortgage process is biased against them.
When applying for a mortgage, lenders must consider a person’s earnings and how they will sustain these earnings. Business owners who have a dependable revenue and keep good records of their income can still get a good deal on their mortgage. Proof of income will be required, and most lenders insist that accounts are prepared by a certified accountant. Additionally, lenders will also require the income that has been reported to HMRC and the amount of tax paid.
Generally, the longer an applicant has been self-employed, the more choice of lenders they will have. However, if a person has only been self-employed for a year, they still stand a chance of getting a loan, as some specialist lenders may consider applicants who have been open for business for a short amount of time. Overall, the specific circumstances surrounding the business will be considered.
The structure of a business is also an important aspect that will be considered. Sole traders will be assessed based on whether their income has increased or decreased in recent years. Lenders will usually take the average income from the past two or three years, if earnings have increased. If overall income has fallen, lenders will most likely use the latest and lowest figure.
For contractors, lenders will multiply their day rate by the number of working days in a year. Furthermore, lenders will also look at a year’s worth of contract history.
Limited company directors are assessed by two methods. For the first, lenders calculate income based on salary and any dividends from the business. The second option is to assess the director’s salary as well as the retained profit in the company. Business owners are encouraged to seek guidance from a mortgage broker, as the independent advice can direct borrowers to lenders that are most likely to provide the best deal.