Many people who register as a Sole trader or partnership do so for a better live, going it on your own away from salaried income can be great, your own boss, higher earning potentials. Many choose this route to have a better life and more financial security for their family. Unfortunately many main stream lenders have not yet adapted to this view when it comes to getting a mortgage. Mortgages for sole traders & partnerships can be difficult to obtain if you have less than 3 years of accounts. Due to the added complexity of verifying income and affordability, many main stream lenders systems are not designed for this. The one size fits all approach taken by many mainstream lenders doesn’t fit with sole traders and partnerships. This is why you may have been declined or are having difficulty getting the right help with your situation.
It may be more complex to get a mortgage if you are a sole trader or in a partnership but this doesn’t mean that it is impossible. Our network of specialist brokers help our self-employed clients get approved for their mortgages on a daily basis, at some fantastic rates too! There are high street names that are more than happy to lend to self-employed customers if you meet the criterion which is usually 3 years accounts signed off. If you have less or complex income then there are a number of niche lenders that have more appealing criteria for self-employed customers.
How long do I need to be a sole trader for before getting a mortgage?
For lenders to calculate how much they are willing to lend they need to work out your annual income. To work this out the lender will need documented history of your income, for this they will need certified accounts and/or your tax assessment form. The longer you have been self-employed with a stable income the better as this reduces the perceived risk to the lender. This is why many high street lenders require at least 3 years accounts before they will approve a mortgage application.
There are other options such as niche lenders that specialise in self-employed mortgages. While these niche lenders are not as well-known as the high street banks they are regulated in the same way and can offer good rates for self-employed customers. Specialist lenders and a few high street names are willing to consider applications from self-employed people with at least 12 months trading history. They will need to see the accounts certified by an accountant.
1 year self-employed – a few lenders that will consider an application
2 Year’s self-employed – More lenders willing to consider an application
3+ Year’s Self-employed – Most lenders willing to consider an application
How to prove income for a sole trader or partnership mortgage
In the past it was easier for self-employed mortgage applicants, self-cert mortgages allowed self-employed individuals to declare their income to the lender without any evidence. While these mortgages made it easier it also allowed for people to stretch the truth and get larger mortgages than maybe they should have when they didn’t really have the ability to pay them back. This put a lot of people into bad credit situations. Following the financial crisis in 2008 self cert pretty much disappeared and were officially banned in 2011. The new regulations that came into force meant that it was now the lenders responsibility to get documented evidence of the income and ensure that applicants could actually afford their repayments the same way lenders have to for salaried employment.
For employed applicants it is a much similar process for showing evidence of income as lenders will typically require payslips with an employer’s reference. If you are a sole trader or in a partnership you will need to give more evidence to prove your income to lenders. Lenders will usually ask you to provide your business accounts and your year-end tax form (SA302). If you are a director of a limited company there will be different criteria, please look at our guide on ltd company director mortgages for more info. They will use these figures to work out your annual income. When a lender requests your information they may ask for 1,2 or 3 years’ worth of accounts, depending on how long you have been trading. They will do this so that they can calculate your average annual income from all the accounts you supply. Each lender is different some will take your most recent years income, some may take your lowest years income. Most often lenders will take an average from the different years.
When lenders are doing their affordability calculations the total amount you can borrow will be based on on any salary you have taken and also any dividend payments. Some lenders will also be able to use net profit figures or share of net profit if a partnership. Lenders will use a multiple of your income to work out the maximum that they are willing to lend you, this is generally in a range of 3.5 to 5 x income. Occasionally some lenders will increase this to 6 x income if the applicant is on a large salary and can afford it.
What other factors will lenders take into account?
When taking out a self-employed mortgage apart from the different method of verifying your income the rest of the criteria that lenders will use to make lending decisions is the same as a standard mortgage.
- Bank statements – usually the past 3-6 months
- Passport or Driver’s license – for proof of identity
- Utility bill or council tax statements – proof of address
Will I need to put down a bigger deposit?
Not necessarily, if your income meets the affordability criteria then you will be able to get the same mortgage products as an employed applicant would. The maximum loan to value is typically 95% which means you will need to put down a 5% deposit to buy your home. If there is any adverse credit or if you are using a specialist lender with a short amount of trading history they may require you to put down a larger deposit to mitigate some of the risk. It’s best to speak to an expert mortgage advisor in this situation. Once they know your full circumstances they will be able to give you the best route to get your mortgage secured.
Bad credit mortgage for sole traders
If you are a sole trader or in a partnership looking for a mortgage but you have bad credit you may still be able to get a mortgage. There are lenders out there that will consider applications from self-employed people with bad credit. When it comes to bad credit histories time really is a healer. The further away you are from your last adverse credit event the better. If you have any CCJ’s or mortgage arrears in the last 12 months you are very unlikely to find a lender willing to lend. If you have had late or missed payments more than 2 years ago there are a few lenders willing to consider this type of lending. For more information on bad credit mortgage get in touch with us and one of our experienced advisors will help you.
Commercial mortgages for Sole traders
Commercial mortgages are financial products for companies to buy a premise or grow the business (buy to let properties, purchase another business etc). Commercial mortgages can be taken out by a company. A mortgage for a personal property is not classed as a commercial mortgage.
Best mortgage rates for Sole traders
To get the best mortgage rate it is really going to come down to the criteria, with a good trading history, high credit score and no credit issues you are in a good position to get the best rates. If you have a shorter trading history or adverse credit you will likely need to use a specialist self-employed lender. To mitigate the added risk of lending to applicants that other banks likely wouldn’t they typically charge a slightly higher interest rate. Once you have a longer history, gained more equity in your property you can remortgage when you have more options
Sole Trader mortgage brokers
Due to the added difficulty of securing a mortgage as a sole trader it is best to find a specialist sole trader mortgage broker or a general self-employment mortgage broker. The added time in the application process can put more general brokers off being helpful to you. They may not have relationships with specialist lenders so won’t be able to help you in some circumstances. Get in touch today to speak with a specialist mortgage advisor that has the experience and knowledge of the self-employed market.
Give us a call on 0161 209 6700 or fill in one of our enquiry forms to get your mortgage application started.