So, I’m self-employed, how much can I borrow?
This is the first question for most people looking to purchase a property. However, when you are self-employed this isn’t always a straight-forward question to answer.
You need to start with the basics – How long have you been self-employed?
A handful of lenders will work on one year’s accounts but, a handful is probably being over generous. Most will want two, if not three full years accounts before they will consider your mortgage application.
Next, how much do you earn?
This really does provoke a range of answers, most of which are incorrect or illegal.
The old favourite stock answer is “Whatever I need to earn. My accountant will put down whatever my income needs to be”.
Another is, “I pay myself £1000 a week so I earn £52000 a year”.
A realistic answer is “I haven’t got a clue but I know my accountant does a good job & I don’t pay a lot of tax”.
Lenders have got wise to this and closed the loop-holes around the self-employed. Sorry, but there is now no such thing as “self-cert” any more.
Today, lenders require legitimate proof of income by way of the tax returns your accountant has submitted to HMRC. To find out what your income really is and more importantly – what the lender will accept, you need to call HMRC on 0300 200 3310 and ask them to send you your latest three years SA302s. You will need to have your National Insurance number to hand as one of the qualifying answers.
(Lenders will not usually accept tax returns as proof of income, even if they are produced by an accountant. The SA302 is what is registered with HM Customs as opposed to what the accountant intends to file, even though this is still basically your tax return! By using the SA302’s the lender has the definitive submission.)
Once you receive your SA302s you can clearly see your declared income and can assess whether you are able to move forward with your mortgage application. The figure usually used is “Total Income Received” and best case scenario is that you will be offered up to 5 times this amount however 4.5 times is more realistic.
Some lenders will use the latest year’s figures if they are increasing, some will take an average of the latest two years. Others, especially if there is a drop in profit, will want to use an average of the latest three years numbers.
If you are hoping to take out a buy-to-let mortgage, some lenders require proof of income in the region of £25k per annum but others have no income requirements on applications.
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his article was kindly contributed to Pace Properties by Paul Flavin, of Zing Money. It is Paul’s belief that good financial advice should be available to everyone & that by simplifying the mortgage process you are able to make an informed choice through greater understanding.
Paul places great emphasis on customer service & always seeks feedback on how to best improve this area. “Making a house purchase or remortgage as painless an experience as possible for you is my objective”.
