One of the top concerns of many freelancers is whether they will be able to be accepted onto a mortgage. Securing a mortgage is difficult for the best of us. With tighter rules enforced by lenders, there has been an increase in applications being declined, with freelancers often being very present on that list.
Why is it harder to get a mortgage when you’re self employed?
After the credit-crunch it became harder for self-employed workers, freelancers and contractors to get a mortgage. Prior to 2007, self-employed workers could apply for a self-certification or self-cert mortgage. With these loans, borrowers didn’t have to prove their income using bank statements or payslips; instead they simply told the mortgage lender what they earned. Abuse of loans led to the self-cert mortgages being dubbed ‘liar loans’. As a result self-cert mortgages were banned, making it much more difficult for the self-employed.
What you need to get a mortgage as a self-employed worker:
· Two years of accounts
· An accountant
· A track record of regular work
· A healthy deposit
· A good credit history
How your business structure affects
There are tree options you have when it comes to setting up your business: Sole Trader, Partnership or Limited company. What one you operate under can influence how lenders view your income. It is important that you do not undersell how much you earn in the prior years to your mortgage application so that lenders can get the highest and truest estimate of what you earn.
As a Sole Trader, keeping records is reasonably straightforward and you get to keep profits.
It is the profits that a lender will consider when assessing your income. If your taxed by self-assessment and get HMRC to calculate it for you, you may get a form called an SA302, which shows the total income and total tax due.
If your business operates as a partnership, lender will look at the profits of each partners share. Therefore make sure that accounts show exactly how much money you earned so lenders can easily spot your annual income.
If you operate as a limited company, your business is separate from your personal affairs. A limited company will have at least one assigned director. Directors will usually pay themselves a basic salary plus dividend payments. Be sure that the lender takes both of these elements of your income into consideration when assessing mortgage affordability.
Proving your income
In order to prove your income you will have to provide your lender with at least two years of accounts. Get a chartered accountant to put your accounts together so your lender can be confident that they are accurate. But make sure you understand the figures so you can answer any of their questions.