Individuals who are self-employed often have many questions when it comes to obtaining a mortgage. How many years do individuals need to be self-employed?
What is the most that can be borrowed? How do lenders evaluate their accounts? Can they still be considered for a mortgage if they have credit issues?
All of these questions can leave self-employed individuals feeling confused and even distressed about obtaining financial support they need to purchase a property through a mortgage.
The foremost reason individuals who are self-employed for a shorter period of time have difficulty obtaining a mortgage is because lenders have less information to establish how much the individual earns, making it difficult for them to properly access the risk of lending to that individual.
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Self-employed individuals who have been working for less than two years generally pose a greater risk of repayment default than those individuals who have been self-employed for three years or more. Long established self-employed individuals are generally viewed by lending organizations as normal mortgage applicants.
In past years, self-certification mortgages were a viable option for self-employed individuals – individuals would simply tell the lending organization what was being earned and how much they would like to borrow without having to show any proof through accounting documents.
Because of the recent recession, lenders must now be more careful about lending and how much they lend. This enhanced restriction on borrowing funds has changed the financial landscape for business owners and self-employed individuals, finding them struggling more than ever to obtain the financing they need.
Traditionally, lenders will require self-employed individuals to present at least three years of account data in order to apply for a mortgage. With the finance and lending landscape changing to meet modern standards, more and more lenders are willing to consider mortgage applications with only one year’s account information. The only restriction with this circumstance, however, is that lenders will still require the applicant to have completed and filed a tax return for their first year in business.
This information helps lending organizations make informed decisions about the funding they provide.
However, if a self-employed individual is near the end of their trading year (within the final two months) it may still be pertinent to place a mortgage application into motion. Decisions on mortgage lending usually take about three months to complete – this time frame gives individuals a comfortable cushion in which to secure a mortgage they are comfortable with and put in an offer on a property.
Lenders will base this decision off of the anticipated profit or salary and dividend which, although not 100 percent accurate, will give the individual a good idea of what mortgage amount will be granted.
Lenders will generally treat self-employed mortgage applicants the same way they treat traditional mortgage applicants. Self-employed applicants have the opportunity to borrow the same amount of money as traditional applicants based on their credit score and earned income – this amount to be borrowed usually maxes out at five times that earned income figure.
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If circumstances permit, lenders may even consider “stretching” or extending this max borrowing amount to a higher level based on the applicant’s income and proven affordability.
On rare occasions, lenders may even consider granting a mortgage based on an income projection from an applicant. This projection is based on the account information that is available for the current trading year that may not be fully completed. An example of this is an applicant who has been trading for a total of 22 months – lenders will base their projection off of the full one year’s accounts as well as the information available for the 10 months of the current trading year, depending on when the applicant’s tax year officially ends.
For the above example, if the previous 10 month’s accounts are on track to project a higher income than the previous year, it is possible for the applicant to request more than five times the previous year’s earned income. This will also depend, however, on the strength and validity of the remainder of the mortgage application.
If the earned income is on track and the mortgage application is sound throughout, a lender may consider basing the amount of funds extended to the applicant on this income projection even if the current trading year is not complete.
Lenders who are willing to extend Self-Employed Mortgages with one year’s accounts generally ask for the same evidence of income verified through qualified accountant references, self-assessment tax returns and finalized account statements.
Although it is possible for required documentation to vary from lender to lender, these three documents are usually required. Regardless of what evidence is needed and how many years of accounts are available, the calculation of income is the same – lenders consider the individual’s net profit as well as the total income received for the business ventures.
Individuals working in almost all occupational sectors can be considered for mortgages by lenders – lending institutions are generally very flexible when it comes to the field in which an applicant works. As long as the profession is legitimate and provides sustainable income, there is little to no concern around the individual’s choice of industry.
Some examples of specific occupations eligible for Self-Employed Mortgages include builders, painters, interior decorators, tradesman, landlords, musicians, business owners, investors, financial sector professionals, taxi drivers – the list goes on and on.
For individuals who only have record of less than two year’s accounts, the rules are generally the same as for those individuals with only one full trading year under their belt. In both situations, only one full set of accounting information is available for lenders on which to base a decision.
Although somewhat scarce, lending organizations do exist that are willing to extend a mortgage based on a projected income figure. If accepted, this projected figure would be derived and built from the last nine months of account information from the latest year which will help lenders make their final decision.
Although there are a number of lenders that will accept applications with only one year’s accounts, the details will be determined by each individual’s unique circumstances. All lending organizations will have different standards and different offers making choosing the right option a decision of personal preference and need.
Some lenders will consider additional factors aside from net income which could include credit history, property type and loan to value figures. As for the type of organization offering these mortgages, they can range from high street lenders to smaller, private organizations.
There are lenders out there who are willing to extend mortgages to individuals with only one year’s accounts who also have credit issues, but there are some restrictions associated with this type of lending. In the current market, applicants would be required to provide at least a 15 percent deposit or 15 percent equity for remortgaging situations.
Additionally, these applicants can not have any CCJs, mortgage arrears in the last two years, or any defaults. Applicants who have missed or have had late payments in the last 12 months are still considered and any mobile phone payment issues are generally a non-issue.
Many self-employed individuals are also considering remortgaging their current property. Applying for remortgaging carries the same requirements as applying for a new mortgage –individuals will generally need to be trading for at least one year or more and have one year’s account information signed off on by an accredited accountant.
Additionally, applicants with one year’s account information can get assistance by buying scheme help to purchase a mortgage. Although there are few lenders who will work with these circumstances it is possible to obtain a mortgage in this fashion and the rates are very attractive.
Although self-employed individuals with more than three years of account information have an easier time securing a mortgage, financing with only one year’s accounts is possible. Lenders understand now more than ever the unique needs of self-employed individuals and are willing to lend given an individual seeks the right organization willing to work with their unique situation.
Yes, lending organizations have tighten their belts on whom and how much they are willing to lend, but individuals with a strong record of repayment and earned income are usually granted the same terms as traditional mortgage applicants.
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