How lenders assess your application if you’re self employed, LTD company or in a partnership
In the previous article, we explained how to get yourself ready for a mortgage application. Everything from saving a deposit, to the costs involved.
You can read more about it here. [1]
For now, let’s look at what you need to know when it comes to how lenders view your application and how the affordability assessment works.
I used to work for a mortgage lender for those who don’t know. My 22 year experience in the industry allows me to guide you through every possible event in the process and find the best option for you.
I know how lenders think. Let’s dive in.
HOW LENDERS ASSESS YOUR APPLICATION
There are over 150 lenders who each have their own bespoke criteria for lending mortgages.
It can take anywhere between two to six weeks to get a mortgage application approved.
The process is usually much quicker through a mortgage adviser because:
- They understand the lender’s criteria
- They have experience in making many mortgage applications
- They have a direct point of contact at the bank in most circumstances
- Sometimes they have access to preferential rates.
The mortgage offer is usually valid for up to 6 months.
The biggest thing lenders are looking out for is: AFFORDABILITY. Generally speaking, most lenders will times your annual income by 4 or 4.5 to assess how much you can borrow. Some specialist products may go up to 5.5x. Your adviser will be able to tell you which one you’re eligible for.
The way this is assessed is down to how you earn money. We shall go through the 3 variants: Sole trader, Partnership and Ltd Company Director in the next section.
Finding the right lender for your requires the following:
- An honest and open conversation with your mortgage adviser who will be able to find the most appropriate lender for you knowing your circumstances
- An up to date credit report
- The correct documents ready as per section 3 (plus any further documentation your broker may request on behalf of the lender)
- An accepted offer on the property you wish to buy
- The right team lined up i.e solicitors
- A deposit and also money for the other fees and costs involved
AFFORDABILITY
Sole trader
If you’re a sole trader it means you run the business as a self employed individual and are NOT incorporated as a Ltd Co.
When you do the tax returns you will calculate your net profit.
Lenders will work off your net profit. Some lenders will take an average over the last 2 years of this figure. Other lenders will work off latest year’s net profit figure.
For example if in Year 1 you earn £50K and you put through the business £20k worth of expenses, then your net profit is £30k.
This means the lender will use the £30k net profit in the affordability and NOT the £50k earnings.
The lenders will then take your net profit and times it by their income multiple which can vary from lender to lender: i.e some will do 4.5x , others might stretch to 4.75x.
Some bespoke lenders and products will offer 5x times income to professionals i.e accountants, doctors, solicitors, etc.
Those lenders who need 2 years accounts, will take an average of the net profit over the two years.
Partnership
When you work as a partnership, it means your split the business profits with somebody else. The lender will take your share of net profit from tax calculations.
For example: you and a business partner earn £100k in the business as a collective. Your share is 50% of the business therefore you earned £50k. You then put through the business £10k of expenses so your net profit in the business was £40k. The lender will use your £40k share as part of their affordability.
Ltd Co director
There are 2 ways to work out affordability for Ltd Company Directors.
There are lenders who will use the director’s salary and the dividends they draw down from the business. I.e Salary = £11,000 and Dividends show = £32,000
The second calculation is using director’s salary plus a share of the company’s net profit as per the company accounts.
For example: Salary = £11,000 and Share of Business is the percentage of what you own in the business. If you own 100% of business then the lender will use 100% of the net profit. If you own 30% of the business, then the lender will use 30% of the net profit.
FINDING YOUR PERFECT FIRST HOME
The first step in the homebuying process is….
NOT VIEWING A HOME UNTIL YOU KNOW HOW MUCH YOU CAN AFFORD.
Many people start with house viewings because let’s face it, it’s exciting to view potential dream homes. But I don’t want you to be disappointed.
In order to know which property to shop for, you need to speak to a mortgage adviser first who will be able to tell you how much of a mortgage you can get and therefore what property price range you can afford.
Once you have these numbers clear, you can obtain a free Decision In Principle, also known as an Agreement In Principle (abbreviated to DIP & AIP)
This is what estate agents want to see.
An estate agent will want to see this document as proof that you can potentially get a mortgage.
There’s no point showing you round a £750k home if your budget will only permit you to shop for a £350k home. The DIP/AIP will confirm this for you and the agent.
Work with me
Have you got your numbers right? I can help you get the numbers in order so that you can feel confident and excited shopping for a mortgage and a home.
If you haven’t already, check out the other articles on our website for further information and top tips.
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