Obtaining a mortgage when self employed used to be much easier as you could self certify your income without providing any evidence. Loans were frequently approved without evidence of income, resulting in a number of people struggling to afford their mortgage payments as they borrowed more than they could comfortably afford, usually inflating their income.
Anyone who has an irregular income, either from multiple employment sources or being self employed will be required to produce a complete set of accounts, usually for two or three years, and completed self assessment tax returns. Employed individuals find it easy to prove the level of income they receive, with a form P60 which is provided by their employer at the end of each tax year, showing pay and tax details for the year. Although self employed people often earn more than someone who is employed, it can still be difficult to obtain a mortgage.
It is the practice to minimise tax deductions by legitimately claiming all expenses and deductions that are incurred in the course of carrying out business duties. The expenses and deductions are subtracted from the gross profits, leaving the net profit. It is the net profit which a mortgage lender will use to calculate the amount you can borrow. Prior to applying for a mortgage, it may be advisable to reduce the expenses and deductions so that you maximise profits, allowing you to borrow a higher amount.
People who have only just become self employed will struggle to prove their income, as they may not have accounts or a self assessment tax return to provide, and many lenders require accounts for up to three years. A self assessment tax calculation can be obtained from HM Revenue & Customs, which is a form SA302. The form will display the information required which covers a specified period, typically two years. If business accounts are requested, the latest accounts must be provided and be no more than 18 months prior to the mortgage application.
It is also possible to obtain an accounts certificate from your accountant if necessary. If you are a shareholder of a limited company, you will possibly receive a combination of a salary and dividends, which is efficient tax planning. Combining the total of the two received will give you your net profit. Prior to applying for a mortgage, it may be prudent to draw a larger salary or dividends rather than leave profit in the company as investment, as this will increase your net profit available to calculate the size of loan.
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