RICHARD JENNINGS MORTGAGE SERVICES
Self Employed Mortgage
Obtaining a mortgage can be a complex process, particularly for self-employed individuals. The perceived income instability associated with self-employment can make it seem like a daunting task. However, with the right guidance and preparation, it is possible to navigate the mortgage acquisition process successfully.
Getting a mortgage when self employed
Navigating the process of obtaining a mortgage can be particularly challenging when you're self-employed, as lenders often require additional proof of income stability and financial viability. They scrutinise your income, debt-to-income ratio, credit score, and overall business viability to determine your mortgage eligibility.
For self-employed individuals, the burden of proof is usually higher. Lenders may require two years of tax returns, profit and loss statements, personal bank statements and business bank statements. This is to ensure that your business is profitable and can sustain mortgage payments over a long period.
Additionally, your debt-to-income ratio plays a critical role. This ratio, which compares your gross monthly income to your monthly debt payments,. A higher ratio may raise red flags about your ability to manage additional mortgage debt.
Your credit score is another crucial factor. A higher credit score may help you secure a mortgage at a more favorable interest rate. Hence, maintaining a good credit history is imperative.
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Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.
Sole Trader and Partnership Mortgages
A mortgage for a sole trader or Partnership is a type of loan that allows self-employed individuals to purchase a property. Unlike traditional mortgages, which require proof of income through payslips or tax returns, sole traders can provide evidence of their income through bank statements and tax returns or an accountant's letter. This type of mortgage can be more challenging to obtain, but it can be a viable option for those who are self-employed.
Limited Company Director Mortgages
When a limited company director purchases a house in their own name, they typically apply for a personal mortgage. In this case, the director is personally responsible for repaying the mortgage, rather than the company. The director's creditworthiness and financial history are taken into account when applying for the mortgage. Regular payments, including both principal and interest, are made to the lender until the loan is fully repaid.
What Income will lenders use as a sole trader?
In the realm of self-employed mortgages, understanding the specific income lenders will consider for sole traders becomes paramount. Generally, lenders will take into account your net profit when assessing your income. This figure is derived after deducting business expenses from your total income, presenting your 'take home' earnings. However, the exact calculation may vary from lender to lender.
Some lenders might also consider other income sources, such as dividends from investments or income from rental properties. It's essential to have this income properly documented and consistently reported in your tax returns for lenders to consider it. If your income varies significantly from year to year, lenders may take an average of several years' income.
It's worth noting that while lenders want to ensure you have enough income to cover your mortgage repayments, they also look at your debt-to-income ratio. This ratio, which compares your monthly debt payments to your monthly income, plays a significant role in determining your borrowing capacity. If this ratio is too high, it may hinder your ability to secure a mortgage.
As a sole trader, it's crucial to keep your business finances in order and have a clear understanding of what income you can use when applying for mortgages.
What income will lenders use as a company director?
In the context of mortgages for company directors, it is imperative to understand what specific income components lenders typically consider when assessing a director's mortgage application. This knowledge is crucial because it directly impacts the loan amount one can secure.
Lenders typically consider two main sources of income for company directors: salary and dividends. The salary portion is straightforward; it is the fixed regular wage that the director draws from the company. Dividends, on the other hand, are a share of the company's profits that are distributed to the shareholders, which often includes the director.
Some lenders may also factor in retained profits within the business. This is the net income left in the company after dividends have been paid out. However, not all lenders consider retained profits, so this can vary from lender to lender.
It's important to note that while the above components are generally accepted, each lender will have its own specific criteria. For example, some may require a minimum level of salary or dividends, while others might look at the average income over a certain period. Therefore, it is crucial for company directors to understand these factors when approaching lenders for a mortgage.
Can you get a mortgage with 1 years accounts?
Securing a mortgage with only one year's worth of accounts as a self-employed individual can be challenging, yet not impossible. Traditional lenders usually require at least two or three years of accounts to assess your financial stability. However, some specialised lenders cater to the unique needs of the self-employed and are willing to provide loans based on a single year of accounts.
The key is to demonstrate a steady income and the potential for future earnings. Lenders will scrutinise your income, expenses, credit history, and overall financial health. They may also consider the nature of your self-employment; for instance, a freelancer with a diverse client base may be seen as less risky than a sole trader reliant on one client.
Your chances can be improved with a larger deposit, a co-signer, or by seeking assistance from a mortgage broker experienced in self-employed mortgages It's vital to maintain immaculate financial records and seek professional advice to navigate this complex process.
Remortgaging when self employed
While obtaining an initial mortgage as a self-employed individual presents its own set of challenges, remortgaging can introduce a different, yet equally complex, array of considerations. The underlying issue remains the same - proving your capacity to meet financial commitments. However, the process of remortgaging often requires additional documentation and meticulous financial planning.
Lenders tend to review self-employed applications more rigorously due to perceived risk. They will likely request for the last two to three years' worth of business accounts, SA302 tax return forms, and bank statements. It's also crucial to have a robust credit score, which can be a decisive factor during the evaluation process.
Moreover, fluctuations in income, a common trait in self-employment, could potentially deter lenders. Therefore, maintaining a consistent income record and evidencing a stable financial future can significantly enhance your remortgage prospects.
Additionally, the type of trading structure, such as sole trader, partnership, or limited company, could impact the assessment. Some lenders may view certain structures as more risky than others.
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