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Let’s not beat around the bush – getting a mortgage if you are self-employed or run your own business is hard. There are a lot of obstacles in the way of buying a property and if you are in the position where your work and your income fluctuates, then it can feel impossible to break through. Happily, though, it doesn’t need to be as bad as it first seems and having an accountant can make it possible.
At Black and White Accounting, we are able to help you secure a mortgage when self-employed.
Why getting a mortgage when self-employed is difficult
Mortgage lenders are very keen to make the right decisions with their money and part of that is performing a risk assessment on every applicant. If you are an employee with a regular salary and years of history regarding your income and outgoings, then the assessment is very simple; almost at a single glance the prospective lender can see whether or not you look reliable.
When you are self-employed, or the director of your own limited company, that risk assessment becomes a lot more complicated. First of all, you might not have the history in your business to be able to show any level of stability, and secondly, you may be trying to obtain a mortgage based on the money that you know is going to be there to you grow your business, but the mortgage company is keen to look at how things stood a year, two years and even three years in the past! Anyone who has run their business for a while knows that even a single year can make a huge difference in terms of growth and income.
It gets worse. Lenders are used to assessing your mortgage viability based on things they are comfortable with – a regular PAYE salary, for example. Ask them to take into account a minor salary from your limited company that’s coupled with dividends in your position as director and shareholder, or make an assessment taking the last six months into greater consideration than the previous 18, and you could be out of luck.
How your accountant helps
Showing your credibility
Having an accountant adds a level of respectability to your business that lenders appreciate. When you have an accountant, lenders can be sure that there’s a second set of professional eyes looking over the paperwork, and that there’s someone with a good understanding of your business (and probably personal) finances who is there to advise.
It’s not merely a feeling of confidence that an accountant brings, however, but the ability to clearly present the information in a way that the lender needs.
Presentation is everything
It’s not enough to simply say ‘I have this much money each month to pay the mortgage’; the lender needs to see that number themselves. Mortgage providers will look to bank statements as a good indicator of your finances, but when you run a business those statements can be complicated and not present the information in a way that makes immediate sense to the person making the final decision.
An accountant will go through your finances, both business and personal, and draw up the information in a way that clearly shows your level of affordability. This is key, as clearly showing your income, your outgoings, and your business stability all help the lender assess the risk you present. With this data, they can make a decision that is right for them, but also the best for you. Ever since the crash of 2008, mortgage lenders are extra careful to be responsible and only lend when absolutely convinced you can afford the debt. Properly presented finances help them feel comfortable with the investment.
Improving your position
Remember, your accountant works for you. While we are obliged to be truthful and professional, we will work with you to try to achieve your end goals. With respect to a mortgage application, you may be looking to maximise your possible mortgage size and buying power – an accountant can help you do that.
Mortgage size depends strongly on two factors – your income and your affordability checks. Both are somewhat changeable when you are self-employed and your money fluctuates from month to month, so it is important to look properly at your business cashflow and look in-depth at what should be presented to the lender to maximise your chances of a successful application.
Finding the right mortgage lender
While we don’t recommend any particular lender, we do advise that you seek out a specialist mortgage broker or advisory service. Rather than a bank, an independent broker will be able to talk to multiple specialist lenders and help you find one that understands the specific needs of a self-employed or company-owner applicant.
There are many specialist mortgage lenders across the UK who are more able to properly assess your personal circumstances through independent underwriting than the firmer rules that many of the well-known banks employ.
If you do not have a broker in mind, we would be happy to provide a recommendation here, to help you.
Other factors
Remember that getting a mortgage requires more than simply a good set of accounts. The following factors are all things you should consider before making a mortgage application:
The length of time you have been in business
Simply put, the longer you have been running your business, the greater the chance of mortgage lenders being willing to offer a loan. Historically, self-employed people have had to wait until they can present a full three-year accounting history before making a successful mortgage application, but that is no longer the case, with many lenders willing to consider applications from people at any stage of their business.
A willingness to consider does not mean a guaranteed successful application, so if you are able to wait and put more months of solid reporting and accounting behind you, you will improve your chance of a good mortgage deal.
Your credit history
Nothing harms a mortgage application more than a poor personal credit score. Again, with a lot of competition for mortgages and the right mortgage broker, there are specialist lenders who are willing to lend to those with CCJs or even bankruptcies on their file, but these things don’t help.
When you realise that you are on something of a back foot due to being self-employed, adding another consideration like bad credit to the mix can put you in a very tight corner.
If you do have a poor personal credit score, we do advise that you hold off on your mortgage until you can improve it and present yourself in the future as a far lower risk.
Your tax set up
There are many ways to set up your income as a shareholder in a limited company with different tax advantages and disadvantages. One might be to receive a smaller regular salary and rely more heavily on company dividends for your income, shifting the balance towards corporation tax rather than personal income tax.
While this is a perfectly legitimate way to run your business, it can present your personal income as being low – and remember you will be buying the property personally, not through your business.
This has the effect of lowering your maximum mortgage size and can hinder your application. For that reason, it is worth discussing your desire to obtain a mortgage with Black and White Accounting, so that we can ensure your salary and tax accounting is set up more favourably for a future mortgage application.
Joint applications
If you are married, in a civil partnership, or living with a partner, your mortgage lender will expect you to apply for a joint mortgage. If that same partner doesn’t have an independent career but works alongside you in some capacity in your business, then it may affect your mortgage application as the lender’s risk is increased.
Being prepared and understanding the situation can help increase the chance of your success in buying a property, so be sure to discuss your mortgage with your partner and with us from an early stage so that any adjustments that may help your application can be made as soon as possible.
Raising a deposit
Some lenders are willing to offer 95% LTV (loan to value) mortgages, meaning you only need a 5% deposit; however, this is unlikely to be the case with a self-employed mortgage. We advise strongly that you prepare for a 10% or even 15% deposit request from the lender and save accordingly.
A self-certified mortgage
In the past, it was possible to get a mortgage through self-certification. This was a typical way for a self-employed person to avoid the rejection and complexity of a standard mortgage application.
Through self-certification, you essentially signed a document that stated that you could make the regular mortgage repayments and were willing to take the risk on personally. Self-certification mortgages obviously have many flaws and were in a large part responsible for some of the financial instability during 2007/08.
Consequently, they were withdrawn from the financial market in the UK soon after the crash and are not available today.
If you do come across a self-certification mortgage (from a foreign lender, for example) then we advise steering away from the situation and contacting us or a certified mortgage advisor to work towards a more secure and regulated loan.
Self-employed mortgage help from Black and White Accounting
Our team are experienced in helping small business owners, contractors, freelancers and sole traders in presenting their accounts with a view to obtaining a mortgage. We can work with you from the very early stages until you are ready to make the application and are happy to look at both your business and personal financial situation to offer you the greatest chance of success.
Fill in our contact form to have a member of the team get back to you or give us a call today!
