Many people dream of becoming their own boss and enjoying the flexibility that self-employment affords. But when it comes to securing a mortgage, being classed as self-employed, rather than employed can seem like pushing water uphill.
The good news is that it doesn’t have to be that hard – it is possible to get a mortgage, you’ve just got to jump through more hoops to prove your income compared to an employed person and it helps to know what you’re doing.
To give you a head start, my two-part blog series starts here with “how to prove your income from self-employment” and I’ve followed this up with “6 tips to boost your chances of getting a mortgage”.
Why is it harder for self-employed to get a mortgage?
Lenders love borrowers who are more likely to have a solid and predictable financial history. Employees for example, have regular income and it’s easy to prove via monthly PAYE slips.
In general, lenders feel nervous about extending loans to the self-employed. Self-employment covers so many different business types and patterns of remuneration that assessing income can seem complicated and not all lenders understand the nuances.
Take for example a freelancer working for many clients whose levels of income may fluctuate considerably month on month. The “feast and famine” cycle is intrinsic to this type of work.
Or a company director, who may take very little out of his business in the form of salary or dividend but choose to keep some of his profit in the business to fund future cash-flow requirements.
Not all lenders understand the different permutations – the onus is very much on the self-employed individual to prove their income and performance of their business
How can I prove my self-employed income?
Lenders will usually assess self-employed income in different ways – depending on whether you operate as a sole trader, partnership, or as a limited company.
Sole trader (One-man band)
There is no legal separation between you as a sole trader and the business so profits your business makes equate to the sole trader’s personal income.
Lenders will often request the SA302 when wanting to verify your income.
What is a SA302?
This is the tax calculation summary from your self-assessment return. The top section shows the “profit from self-employment” figure together with any other income you have declared to HMRC.
You are often required to produce SA302 calculations for 2 to 3 tax years.
How can I obtain a SA302?
If you have engaged an accountant to help you with your tax affairs and they use their own bespoke tax software, then you could ask them to generate the SA302 copies.
If you or your accountant has used HMRC’s online portal to file your return then you can print off your own SA302’s by doing the following:
- Log in to your online HMRC account
- Follow the link ‘tax return options’
- Choose the year from the drop down menu and click the ‘Go’ button
- Select the ‘view your tax return’ button
- Follow the link “view calculation” from the left hand navigation menu
Alternatively, if you have filed a paper return or you can’t access your online account then you can contact HMRC and request a paper copy. You will need to give your full name, address, Unique Tax Reference (UTR). This process can however take up to 2 weeks so make sure you request these in good time for your mortgage application.
A few tips:
- Make sure you have actually filed the returns, particularly the most recent tax year in question.
- Work out which tax years you need – it’s worth requesting the last 3 tax years
- Your situation will be most straightforward if your accounting year end matches the tax year end (31st March/5th April)
Tax Year overview
Although the SA302 is the main method used by lenders to prove sole trader income, you may also be asked for a Tax Year overview.
You can obtain one by doing the following:
- Log in to your online HMRC account
- Follow the link ‘View account’ and then “Tax years”
- Choose the relevant year from the drop down menu and print the overview
If you go into business with someone else, you might set up a partnership. When looking at your income, mortgage lenders will look at each partner’s share of the profit. You will require similar documentary evidence as outlined above.
Director of a limited company
If you are a director of a limited company, you will often need to prove your personal income so lenders may want to see the SA302 calculation from your self-assessment tax return.
Problems with proving personal income with a SA302
Most director’s take a small salary and top this up with dividends when they extract profits from the business but the flexibility in remunerating themselves can often lead to difficulties in proving income to lenders.
Some lenders tend to only focus on salary so make sure the lender you’re applying to takes both dividend and salary into consideration when working out how much they will lend to you.
The other difficulty is where you have withheld paying out any salary/dividend and instead retained profits within the business to fund cash-flow requirements. In this instance company accounts accompanied by an accountant’s certificate will support your case for establishing the underlying financial position.
Limited company accounts
You may be asked to provide several years’ worth of limited company accounts. These are the accounts that your accountant prepares and submits to Companies House.
The detailed copy of the accounts that you and your accountant have signed is the copy you would be expected to produce.
You may also be asked to provide an accountant’s certificate. Your lender will have their own questions and liaise with your accountant, requesting confirmation on salary, dividends and profit figures.
A few things to take note of:
- Some lenders state that the accountant must be Certified or Chartered. You can find a Chartered Accountant near you here.
- Accountants usually charge a fee for the task of certifying your income so make sure you discuss the process and fee in advance
What happens if I don’t have two or three years’ Accounts or SA302’s?
Lenders will always be more cautious about lending if they perceive your business to be young and not yet well established.
It’s worth talking to a mortgage broker who can put you in touch with more flexible lenders, some of whom are prepared to consider professionals who have recently become self-employed with only one year’s accounts.
Evidence of work lined up for the future, large savings or a proven track record of regular work will all be factors working in your favour.
Although the whole process of getting a mortgage for the self-employed can seem rather daunting, if you’re armed with the right documentary evidence and you’ve done your research to find the best lender, you should be in a strong position to secure a loan.
And, if you’re looking for a Chartered Accountant – take a peep at how I can help you.
Don’t forget to catch up on part two of my blog series on “6 tips to boost your chances of getting a mortgage”.
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