13 Nov Mortgage Myth’s
The misconceptions with Mortgages and sole traders/Directors
So, we all KNOW that to get a mortgage we need to prove our income, and this goes back 3 years, however what happens if we don’t have 3 years’ worth of income to show… what if we are a director and actually don’t have ANY pay slips? that means we can’t get a mortgage rite… WRONG!! Here are a few things we have recently learned about getting a mortgage when you have your own company.
So, it turns out that you don’t actually need 3 years’ worth of proof at all, all you need is a good mortgage adviser who can work All of market! We have recently been in touch with the fab Hudson Rose and here are a few things they taught us.
So as a sole trader you ideally need 3 years’ worth of accounts, this is not a necessity though, the minimum period you will need is 1 year however you will have more options with 2.
The accounts you provide will generally need to be no more than 18 months old and will normally be averaged out across the periods, however some lenders will look at the most recent figures. If this is the method taken and your profits have increased by 10% or more lenders will normally require an accountant’s letter to show that the increase is sustainable.
For all of these options you will need SA302 from your online portal or a tax calculation which is obtained from your accountant, a tax year overview which can be downloaded from HMRC backing up the information provided from the SA302 or tax computation and a set of company accounts which shows the break down of the income and the costs of the business.
LLP, Limited liability partnership
As it is not necessarily feasible to show the company accounts of a partnership underwriters will accept a letter from the managing partner or company accountant that shows your share of the profits along with income and shares from previous years.
This can also be the case for people who have been promoted to partner but haven’t completed a years’ worth of returns. This letter can be used to confirm your expected income, so you don’t even need to have a years’ worth of accounts!
LTD Company Directors
So, directors are assessed as self employed by mortgage lenders when they hold a controlling share of the business (normally an excess of 10% or more) under this amount they will be classed as employed.
Lenders will look for the company accounts or an accountant’s letter to see the profitability of a business and not just the pay slips received by the director. This is because the company is a separate legal entity, it can take out loans and draw on overdrafts, as a director can Controll where these funds go they could be paying themselves with this source of income meaning the pay received is not necessarily sustainable. Lenders will be looking to see that the company is profitable and will continue to be in the future.
So as a minimum Lenders look at the salary and dividends received, these are averaged across the periods given or from the latest figures.
In some cases, they will also look at the share of the net profit due to a director. As these profits can be retained by the director if they chose to draw on them lenders will accept this as additional income. This is again averaged out or the most recent figures used.
The documents they will require for this is Company accounts a SA302 or tax calculation and a tax year overview, so much the same as with sole traders. Underwriters may also want to see a bank statement or require further information from the company accountant depending on the individual circumstance.
This can cover a different range of workers and is calculated quite differently, here lenders use something called a contract value. The calculation can vary but is loosely based on the day rate x 5 days x 46 weeks, this is then the yearly figure used for the income of the applicant. This calculation means that lenders do not require the company accounts or tax returns which means the contractor can benefit from using their full income.
So, there are a few ways in which you may be able to get a mortgage without the financial information we all thought we needed, these are just a few routes that can be looked at but they can vary greatly. The best thing to do if you are looking at moving or buying for the first time is to get in touch with a mortgage adviser that is well versed in this area and is whole of market.
We really Love Hudson Rose and are confident that if there is a solution to be found they will find it. Give them a call on 03301229920.