How to Prepare for a Mortgage

When it comes to buying property, it isn’t as simple as handpicking a home that falls in line with your budget. In many cases, you must get “credit ready” before looking into various mortgage options.

To start off, you need to paint your borrowing history in a positive light so that mortgage lenders can work with you without hesitation.

Here are steps to help you prepare for a mortgage:

Registered Voter

Lenders need to confirm your postal address and for this purpose, you must be registered on the electoral roll. This also helps the lender track down your credit history when the need arises.
Unless you’re registered, it’s quite unlikely that the lender will process your application due to not having enough information.

Credit Applications – Be Selective

Too many rejected credit applications are going to look bad when you apply for a mortgage. This will 100% suggest to the mortgage lender that you’re simply not ‘credit worthy’ or that you’re desperately trying to get your hands on any mortgage you can find – which will raise a lot of eyebrows so as to whether you can repay your mortgage.

Take a Close Look at Credit History and Score

You should check your credit browsing history and score ahead of time. Lenders expect correct information regarding your ability to make mortgage repayments – therefore, you need to deal with any inaccuracies in advance.
Furthermore, a low credit score will reduce your ‘credit worthiness’ in the eyes of lenders. So before you make a mortgage application, determine what credit habits you can improve in order to bring up your credit score.
With that said, credit scoring bands may vary between credit reference agencies. Do your research or hire a Mortgage Advisor.

Cut Down Debt-to-income Ratio

As you might imagine, this is the ratio of debt in relation to your income. The higher your debt, the higher this ratio is.
Lenders will always prefer applicants with a lower debt-to-income ratio because this tells them that they are capable enough to make the mortgage repayments on time each month.

Eliminate Unnecessary Borrowing

Six months prior to taking a mortgage, it is never a good idea to open up new credit lines. This will inevitably increase the debt-to-income ratio, which again, will reflect adversely on how capable you are when it comes to repaying mortgage loans.

Don’t Close Older Credit Accounts

We don’t want to close these off because they can show lenders that, in the past, you have successfully made repayments over a certain time frame.
Inactive accounts, on the other hand, should be closed as that would indicate to lenders that you have a lot of credit lying around that you don’t need.

Pay Your Bills on Time

Before filling out your mortgage application, make sure that all bills are paid on time even if your credit history looks healthy.

Since borrowing records are persistent, any shortcomings in terms of bill payments might signal a red flag and cause the lender to cast doubt on your ability to make mortgage repayments.

Get Rid of Outdated Financial Associations

Your financial associations can negatively affect your chances of obtaining a loan. For instance, you may have had a financial association for paying bills with a separated spouse or a joint account with a former housemate.
You need to end this association because their borrowing habits in the near future might impact your credit applications.

Run a Check on All Joint Applicants

If it’s a joint mortgage application you’re making, the credit worthiness of everyone involved comes into play. Lenders are going to take everyone’s credit history into account before agreeing to offer you a mortgage.

Mortgage lenders' income requirements for the self-employed

If you’ve found this page, chances are you are concerned about being accepted for a mortgage because you are self-employed. In this article, we will explore some of the things mortgage lenders are looking for when they make lending decisions and advise on ways you can help ensure your self-employed mortgage application is successful.

Mortgages for the self-employed used to be a lot simpler and had a higher acceptance rate. Self-employed individuals could self-certify their income to lenders, effectively giving borrowers the control to decide how much they should be allowed to borrow. These mortgages were often abused by people in order to borrow more than they could afford. They were subsequently banned in the UK following the credit crunch.

Now, self-employed borrowers need to prove their income in order to be accepted for a mortgage. This makes it difficult for the newly self-employed, as lenders will often take an average of their last few years of income when making a decision.

While mortgages for the self-employed might seem harder to come by, it isn’t impossible. If you are determined to get on the property ladder, there are always mortgage providers who will be willing to help you if you are able to jump through their hoops.

Income requirements for sole traders

As the name suggests, sole traders are one-man bands. If you set up your self-employed business as a sole trader, then calculating your income will be much easier as all company profit is yours to keep.

When considering your income, mortgage lenders will usually want to see at least 2 year’s worth of accounts. They will usually ask to see your SA302 form from HMRC. This is your end of year tax document which outlines your income and expenses and your tax liability.

Most mortgage lenders will either calculate your average income for the past two years if the most recent figure is higher. They might also just consider the most recent year’s total income. Some lenders will ask to see SA302 forms for the past 3 years and work out the average of all 3.

Income requirements for company directors

If you run a limited company, you will likely have a few different income sources. Most company directors take a basic salary and then dividends. Some directors choose to leave profit in the company, so it’s important to find a lender that understands these different income sources and will take them into consideration when making your lending decision.

From our experience of working with self-employed mortgage providers, we have found that Virgin, Woolwich, Clydesdale, Kensington, the Halifax and the Coventry are all open to applications from self-employed individuals. What’s important is that you speak with a mortgage advisor as soon as possible as they will be able to help you to understand your options. You might be declined from one lender and accepted by another, so don’t take an initial setback as a sign that you cannot get a mortgage.

Understanding your income

Your turnover is not your income, so don’t be caught in this common borrowers trap. Lenders will only look at the taxable portion of your income, meaning your profit.

Very few lenders will accept sales projections in lieu of the whole two-year’s worth of accounts, so it’s best to wait before applying for your mortgage. It doesn’t seem fair that you have to be running a business for 2 years before getting a mortgage, whereas a full-time employee only needs to have a job for around 3-6 months before applying. It doesn’t seem fair but company directors will have a hard time getting a mortgage while the people they employ will have it much easier.

What is an SA302 statement?

When you file your tax return with HMRC, you will be provided with a calculation of your tax liability in the form of a SA302. This provides lenders with evidence of your earnings. A common problem that people face is that they sometimes legally adjust their income in order to pay as little tax as possible, but when it comes to getting a mortgage, they want to inflate their income as much as possible. If you are planning to apply for a mortgage, it is best to be upfront and honest about your earnings.

You can request your SA302 on your online government portal account, or you can request one be sent to your home. Requesting one by post can take up to 2 weeks to arrive. It’s best to have an accountant help you prepare your accounts for a mortgage assessment as they will know what steps to take to give you the best possible chance of securing a mortgage, However, it’s important that you understand your income and can explain things like seasonal fluctuations and dips or peaks in income when asked.

Do I have to get a SA302?

No, but it is often the easiest option. Most lenders will either accept your SA302 as provided by HMRC, or a tax calculation that was taken from professional accounting software. If you have your own accountant, they will usually be able to help you to prepare your accounts for a mortgage application. It’s always best to have the documents ready before you start your mortgage application as it can hold up the process.

What if I don’t have two year’s of accounts?

Very few lenders will accept self-employed borrowers with less than one year of trading history. You might have a very strong start to your company followed by a slump in sales. If you nearing the end of your second year of trading, it’s possible that a lender will consider your application if you also have a strong credit history, an existing relationship with the bank, or a healthy deposit. Every self-employed person is different, so the best first step you can take is to speak to a mortgage advisor who will be able to determine which lenders are most likely to accept your application.

How to get a mortgage when self employed?

It’s a wonderful feeling when you can stop paying rent and start paying your own mortgage. Owning your own home is a dream that many people have, but not everyone will achieve. Owning your own home gives you greater financial freedom and is a great investment in your future. For most people, the process is very simple. You approach a lender and tell them about your earnings and how much deposit you can afford. If they agree to lend to you, you can start your house hunt and before long you’ll be moving into your own home. However, for the self-employed, the process looks very different.

With more people than ever before going down the self-employed route, it’s an issue that is going to arise with more frequency. So, here are the basic steps for getting a mortgage when you are self-employed.

Get your accounts in order

In the past, the self-employed could use something known as the self-cert mortgage, but this has now been banned in the UK due to its widespread misuse. When individuals could simply state their own income without proof, some people used this to borrow more than they could afford. For this reason, self-cert mortgages were banned following the financial crash.

Most lenders will want to see at least two year’s worth of accounts for your self-employed business. They will usually accept your end of year form, know as the SA302. They might also want to see your accounts prepared by a registered and/or chartered accountant. This is the only way lenders have to prove your income, so make sure that your accounts are up-to-date and accurate.

It’s common for people to make legal adjustments to their income in order to lessen their tax liability, but this will work against you if you are trying to get a mortgage as it will appear that you earn less and lenders will, therefore, want to lend you less.

If you have more than 1 year of accounts, but less than 2, then lenders might be willing to make a projection based on the information they have or take the first full year’s income as the final amount. If you have more than one year’s worth of accounts and the numbers differ every year, the lender might take the most recent year as your annual income.

Pay attention to company structure

The way you have set up your company will have a huge impact on your mortgage possibilities. If you are a sole trader, then all of your income minus your costs will be counted as your annual income.

If you run a partnership, then only your half of the company profits will be counted as your income. And if you run a limited company and you leave money in the company at the end of the year, it’s important to find a lender that will consider this company-retained profit as part of your income. An accountant will be able to help you to structure your accounts in a way that is most attractive to lenders.

Check your credit score

All lenders will check your credit score before making any decisions. Before you start applying for mortgages, make sure you check your credit score and fix any mistakes which may appear on your record. For example, you should ensure that your address is up-to-date and that all unused credit accounts are closed. If there are any mistakes on your record you can write to the creditor and request that they fix it and give you written confirmation that it is a mistake. Once you have a strong credit report, your application will look a lot more attractive to lenders.

Secure an agreement in principle

If you are keen to start the house hunt but don’t want your mortgage application to delay the process then you can secure something known as an agreement in principle. This is a provisional agreement from your lender outlining what they would be willing to lend you, pending further checks. This will allow you to start your house hunt with a little bit of certainty. Once you have found a place you like, you can put in an offer, and if it’s accepted then you can put in your final mortgage application. An agreement in principle usually lasts around 3 months, so you may need to reapply if you don’t find somewhere suitable in the first 3 months.

Increase your deposit to increase your chances

If you are struggling to get accepted, don’t assume that no one will give you a mortgage. Some lenders are more experienced with self-employed individuals, so often it’s a case of finding the right lender or working with a niche mortgage broker. If you are struggling to secure a mortgage, saving a larger deposit can often help tip the scales in your favour. A healthy deposit of 20% along with two-year’s worth of accounts and evidence of regular income is often enough for many lenders.