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Lenders don't like risk and the uncertainty which can come with running your own business makes them nervous which in turn can make it tricky to find a good mortgage deal.
We take a look at self employed mortgage requirements and run through what you need to do to get onto the property ladder.
There's no denying that finding mortgages for self-employed people is more difficult than if you were in regular employment.
There's lots of reasons for this but they all primarily centre around the risk a lender perceives.
It's much easier for a small business to fail and statistically speaking, a fair proportion do so. Lenders therefore like to see how you have performed over a longer period of time and hope to see stability of income or even steady growth before they will consider lending your money for a mortgage.
Your income is also much more difficult to calculate, making the self employed mortgage criteria much more complicated to assess.
For example, you may have equity you have retained in the business, perhaps you are utilising tax-efficiencies or you might even have marked seasonal variations in your income.
All of these reasons can make a it much more difficult to get approval for a sole trader mortgage and mean you'll need to take a pro active approach to getting a decent deal.
It may sound like a hopeless case but if you take some precautions and put in the legwork you can make it much easier to get the best mortgage rates.
To start with, organisation and planning are absolutely vital.
Get your SA302 ready in advance; getting HMRC to send a hard copy can take a few weeks.
Make sure your accounts are up to date. To stand any chance of getting a mortgage for self employed people, a lender will want to see accounts that aren't any older than 18 months. Getting your accounts completed by an accountant who is either certified or chartered can improve your credibility too.
Many will require you to have been trading - and profitable - for several years, 3 is often the minimum. This means it's often worth looking at fixing your mortgage rate for several years before you become self employed so that you have the security in place.
Once you are self employed and looking for a mortgage, making your business appear profitable and your income stable will be a priority for. Your accountant should be able to advise on the best way to do this.
Don't make fundamental changes to your business just prior to your application if you can help it. This makes lenders nervous, and when it comes to getting a mortgage self employed individuals need to do everything they can to show they are stable and secure!
It's also a good idea to reduce the amount of profit you leave in your business. Again this takes some planning ahead. However, by paying regular dividends it can make it easier for lenders to see your true income. This can help get approval, especially for those looking for mortgages for self employed first time buyers.
You could find that getting some self employed mortgage advice in advance will help put you in the best possible position for when you are ready to start applying.
Then when you are ready to get started, make sure you compare self employed mortgage deals as the rates on offer can vary quite significantly in the market.
Some lenders are more willing to consider applications from self-employed individuals than others so this is a good place to start.
Firstly, consider locking in to a fixed term deal; although by having a fixed rate with fixed repayments you won't benefit if the market falls, you will have the advantage of always knowing what your monthly instalment will be so you can budget accordingly (and get income protection insurance if you decide this is right for you).
Secondly, look for a lender that has some flexibility; there's plenty of mortgages around which offer the facility to overpay when times are good or take payment holidays for example.
Finally, make sure you compare the total cost of the self employed mortgage deals available and choose the option that is cheapest and works best for your circumstances.
Being self-employed can make it more difficult to get a mortgage but if you organise your finances and compare what's available, you will be able to find a deal that's right for you.
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