Applying for a mortgage has become more difficult for everyone over recent years but especially so for self-employed borrowers, especially sole traders. Prior to the credit crunch, lending institutions granted what were termed “self certified” mortgages. In simple terms, these mortgages enabled a sole trader to self-certify, as opposed to proving, their income. The system led to widespread abuses, however, with many borrowers inflating their income artificially in order to borrow more than their actual earnings justified. These mortgages are no longer available, making it more difficult, although not impossible, for a sole trader to obtain a mortgage.
There are various essential requirements to applying for a mortgage if you are a sole trader. These are all related to establishing your ability to repay the mortgage and manage the instalments and include:
- Producing your annual accounts. Most lenders will want to consider at least two years. Some require three years. The more years’ accounts you are able to produce the greater the chance that you will be able to persuade the mortgage lender to offer you a mortgage.
- Engage an accountant if you do not already have one. The majority of mortgage lenders make it a condition that a sole trader applying for a mortgage must have either a certified or chartered accountant to produce their annual accounts. Others, however, are prepared to accept SA302 certificates from HMRC. This is a receipt that confirms how much tax you have been charged by HMRC for the period in question. Either way, you will need clear, supported evidence of your income.
- Keep a good, clear record of your previous work and any future contracts that you have entered into. This type of information can supplement the figures set out in the accounts and other papers and can provide the mortgage lender with additional information regarding the future prospects of the business.
- The ability to provide a deposit, preferably a reasonably substantial one, will go a long way towards persuading a mortgage lender to make the advance that you have applied for.
- Maintaining a healthy credit record will also improve your chances of being granted mortgage facilities. To do this you should make sure that your personal and business debts are paid and that any unsatisfied judgments are discharged.
When you are able to produce the required documentation and proof of your income, the mortgage lender will consider the amount that they are prepared to advance. This will normally be based on an average of your net income (the amount that the business earned after deduction of the business expenses from its gross takings) over the years that you are able to produce accounts for. Some lenders will take into account amounts that you have chosen to leave in the business rather than take out as profits. A mortgage lender is likely to be worried if the financial information provided indicates a sudden fall in profits and, if this is the case, it will be important to be able to provide a reassuring explanation for this.
Because there is a degree of difference between the requirements of mortgage lenders when considering an application from a sole trader, the key to obtaining a mortgage is to ascertain, in advance of your application, exactly what your mortgage company will want and then ensure that you have the necessary paperwork to meet their requirements. An experienced mortgage broker like the team at Mortgage Force Worcester can give you the advice and options you need to get the keys to your next home.