How Just Mortgage Brokers Can Help You
If you are self-employed, it can sometimes seem that the mortgage market is not tailored for you; especially if you only look at the big high-street banks and building societies, which can sometimes be inflexible in how they assess non-standard mortgage applicants. However, there are many lenders out there who cater to the needs of self-employed borrowers, and indeed there are some who specialise in lending to the self-employed and contractors.
Can I self-certify my income?
In the past, it was possible for self-employed mortgage applicants to make a declaration of their income without providing any documentary evidence; these were known as “self-certification” or “self-cert” mortgages. They were straightforward, and allowed the mortgage lender to make a lending decision based on the declared income, and the other information provided during the application.
Unfortunately, self-certification mortgages by their nature were open to abuse by those who wanted to exaggerate their income, thereby improving either their chances of securing the mortgage, or increasing the amount that they would be able to borrow. It is unclear how widespread such false declarations were, but self-certification mortgages were sometimes referred to in the press as “liar mortgages”.
After the financial crisis of 2008 and the subsequent “credit crunch”, mortgage lenders considerably tightened their lending criteria to reduce their exposure to more risky borrowing. As a result, self-certification mortgages disappeared virtually overnight, and mortgage rules subsequently introduced mean that lenders now have a regulatory obligation to verify the income of all mortgage applicants, whether employed or self-employed.
How do I prove my income to a mortgage lender?
Mortgage lending for self-employed people is different in one fundamental way from mortgages granted to those in regular, salaried employment: how the lender verifies your stated income. A PAYE employee can provide a mortgage lender with copies of payslips as proof of income, and lenders may also contact the applicant’s employer to verify the employment details provided on the mortgage application. For self-employed people, including freelance workers, contractors and limited company directors, lenders do not have this luxury.
There are two main methods mortgage lenders use to verify self-employed income: via full accounts, or by SA302 year-end tax calculations (usually along with the corresponding tax year overview) from HM Revenue & Customs. Some lenders may ask to see both accounts and SA302s. We explain more about SA302s and how to obtain them below.
It is important to understand that different lenders apply different criteria to assessing mortgage affordability for self-employed applicants. It is common for lenders to ask for the past three years’ worth of accounts or SA302s; however some lenders – especially more niche lenders that specialise in self-employed mortgages – may only ask for two years’ or even just your most recent year’s accounts. Even if you have been self-employed for less than a year, there may be lenders whose assessment criteria can accommodate your circumstances. Lenders will typically only accept accounts that have been certified by a chartered accountant.
How will the lender work out my income?
When it comes to actually working out an income figure to use in assessing the mortgage application – to calculate affordability and work out the maximum amount you can borrow – again this can vary considerably between lenders. If you have provided, for example, three years’ worth of accounts or SA302s, one lender may use the average of the last two years figures, while another might take the average of the three. This is also possibly dependant on the profits increasing or decreasing over this period.
For contractors, some lenders will ask for a copy of your current work contract, showing the agreed contract rate, and then use the day rate to calculate an annual income figure. For example: £500 day rate x 5 days x 48 weeks (allowing for holidays etc.) = £120,000.
If you run your self-employed business as a limited company, things can be a little more complicated, as different lenders have differing approaches. At one end of the spectrum, a lender may only consider the actual salary you have drawn from the company as income for lending purposes. Others may take account of income drawn from the company in the form of dividends, while still others may consider profits retained within the company structure.
Once the lender has obtained an income figure, by whichever means, they will apply a standard income multiple or assessment of affordability to determine the maximum amount you can borrow. Once again, this differs from one lender to the next, but typically lenders restrict borrowing to somewhere in the region of four or five times the applicant’s income.
What is my credit rating?
What is an SA302?
For people who are registered self-employed with HMRC and submit a tax return each year, the SA302 is a summary of your year-end tax calculation, confirming the amount of income you have declared to HMRC for the tax year from 6 April to 5 April. For mortgage lenders, this provides required documentary evidence of your declared income, to comply with mortgage affordability rules set down by the Financial Conduct Authority (FCA) and to allow them to assess your mortgage application.
What information is on an SA302?
The SA302 tax calculation is a high-level overview and summary of the information you have provided on your tax return, and the amount you have to pay to HMRC for the relevant tax year. It shows the total of your declared income received from all sources including any salary, income from self-employment or partnerships, limited company dividends and interest. Your personal allowance and the total income on which tax is due are also shown. The tax calculation itself breaks down the income tax due and the applicable rates. It also shows the applicable National Insurance contributions due for the tax year.
How do I print out my SA302?
HMRC’s systems can provide the past four years of SA302 tax calculations and corresponding tax year overviews – we recommend checking with the lender or your mortgage broker how many years are required, but if in doubt you are best obtaining the maximum four years’ worth (typically lenders will ask for up to three years, but this can vary between individual lenders).
There are various ways you can obtain these, depending on how you submit your tax return. If you submit your tax returns via HMRC’s online Self Assessment gateway, you can print out your SA302 calculations and corresponding tax year overviews directly from the online system. If you use commercial software to submit your tax return, then the tax calculation can be printed from the software. If an accountant submits your tax return on your behalf, then you should contact them for a copy.
Can HMRC send me my SA302?
At the time of writing, over 50 lenders accept SA302s that have been printed out from HMRC’s online system or commercial software, for the purposes of income verification for self-employed applicants. However, others may only accept original SA302s provided by HMRC. If this is the case, if you do not have a printer, or if you submit your tax return by post instead of online, then you can ask HMRC to send you your SA302 tax calculation.
You can request your SA302 by calling the HMRC Self Assessment helpline on 0300 200 3310, or by writing to Self Assessment, HM Revenue and Customs, BX9 1AS, quoting your National Insurance number and Unique Taxpayer Reference (UTR). You should allow up to two weeks for the tax calculation to arrive, so it is important to take this into account when considering mortgage application timescales.
How Just Mortgage Brokers can help
At Just Mortgage Brokers we have years of experience in helping secure mortgages for the self-employed, contractors and freelancers. We work closely with lenders to understand what documents they need for income verification for self-employed people, and can help you find the mortgage deal that is right for you. Contact us today to discuss how we can help.