Often the biggest obstacle to getting a self-employed mortgage is understanding how lenders will assess your application.
Without this knowledge, It's very easy to make an innocent mistake that will scupper your chances of success.
Well, as the saying goes, forewarned is forearmed. That's why we've put together this list of the 5 most common mistakes to avoid before applying for a self-employed mortgage.
Eliminating these will drastically improve your chances of getting a mortgage application approved.
Read on to discover how to tilt the odds in your favour.
1: Minimising company profits and dividends
We often get approached by clients who've just found a property they want to purchase, but whose income won't quite stretch far enough to buy it.
Often the shortfall is due to intentionally minimised profits. It's understandable, because your accountant will try to use every available allowance and expense to reduce corporation tax and/or your self-assessment tax bill.
This, of course, affects mortgage affordability, because your salary and dividends or net profit will largely determine how much you can borrow.
Talk to your accountant early
That's why we always recommend speaking to your accountant as early as possible. If you think you'll be looking to buy in a year or 18 months time, let them know straight away.
If you can, provide them with an idea of your likely purchase price and approximate borrowing amount.
That way, they can prepare your business accounts and tax returns to show sufficient income to get the mortgage you want.
It will mean more tax to pay for that particular year. But if it allows you to buy your dream home, it's worth every penny.
Nearly all lenders cap the maximum borrowing amount to
4.5 times income for self-employed applications, although higher multiples are available for higher earners and self-employed professionals in certain occupations.
How lenders calculate self-employed income varies according to your business structure. For example:
- Sole traders: Net profit before tax
- Company directors: salary and dividends or salary and net profit (usually post corporation tax)
2: Credit score issues
Your credit rating and history has a huge bearing on:
- whether you can get a mortgage loan
- the interest rate and product fee you'll pay
- the choice of lenders available to you
- when to apply for a mortgage
That's why it's well worth checking your credit report long before you want to apply for a mortgage. With advance warning, it may be possible to resolve any issues and improve your score before you apply.
Here's the key things to check on your report:
Check you appear on the electoral roll
Not appearing on the electoral roll at your current residential address, can have a detrimental affect on your credit score.
If you think you've registered on the electoral roll but it's not showing up on the credit report, speak to your local authority to help resolve the problem. Otherwise you can register here.
It's also important to ensure your residential address is written consistently across bank accounts, council tax, utilities and so on.
Are there missed payments you weren't expecting?
Next, check your credit report for any missed any payments in the past two to three years against:
- credit or store card bills
- utility bills
- secured loans
- personal or unsecured loans
- any existing mortgages (excluding agreed mortgage holidays due to Covid)
Unless it's a missed mortgage payment, an occasional, one-off missed payment is not usually not a huge problem.
But missing two or more consecutive payments can have a negative impact on your credit score and reduce your chances of getting the mortgage you need.
Resolve credit report errors
If the cause of the late or missed payment is a mix up with your utility bill or credit card provider, contact them to see if it can be removed. If it's their fault, and they drag their feet, escalate it to a formal complaint.
At the very least, ask the creditor to confirm their error in writing whilst they get the missed payments removed from your credit record.
The letter can then be presented to lenders in mitigation.
Payday loans - the death knell for mortgage applications
Avoid payday loans. They're a red flag for lenders, because taking one out is an indicator of financial distress and struggling to make ends meet.
If you've had one in the last year or two, most banks and building societies won't lend to you.
Settle CCJs within one month
If you've just had a County Court Judgement (CCJ) issued against you, pay it within 1 month to have the judgement cancelled or 'set aside'. That way, the CCJ won't appear on your credit file at all. Otherwise, it will show up for 6 years
You'll need to provide the court proof of payment from the person or business you've paid.
You can also ask the court to set aside the judgement if you don't believe you owe the money, or were never notified of the original claim.