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So this morning I want to talk about self-employed mortgage applications and tips for getting approval if you’re a self-employed applicant. Mortgage lenders typically look for two years average income, that’s the way that they work, they look at the last two years of business and they’ll take an average of your income. Trading for less than two years is problematic and realistically you’re unlikely to get mortgage approval if you’re trading for less than two years.
It can’t happen too soon
The amount of people that bring us regularly saying they’re trading for a year, trading for 15 months, 18 months, unfortunately the bad news for those people is you’ve just got to do the two years. It’s as simple as that, it’s extremely unlikely you’re going to get approved if you’re trading for less than two years. There are two types of self-employed people, they’re sole traders and then you’ve got limited companies.
Sometimes there is confusion with some PAYE workers, some people who are kind of in a grey area between PAYE and self-employed and contract employment, things like that. Basically it is if you are not paid directly by your employer, if your employer is not giving you a pay slip and is not paying your tax for you, you’re then classed in the eyes of a mortgage lender as somebody who is self-employed. It’s pretty black and white on that.
For sole traders, they’re the straightforward self-employed applicants, it’s pretty simple for them. The mortgage lender will simply look at their net profit. So the net profit is their turnover less their allowable expenses.
What counts and what doesn’t?
The income that the mortgage lender will take into account for a sole trader is the net profit, it’s not the turnover and that’s a common misconception I think we see from a lot of applicants and they’re pretty disappointed with that. They’re in this area they’re earning a lot of money but then they’ve got a huge amount of expenses and unfortunately it’s the after expenses figure that mortgage lenders will take. For a director of a limited company obviously the most important thing there is what is the shareholding of the director applying for the mortgage.
What about directors?
So if the director is a hundred percent shareholder it’s great, it’s pretty simple and a little bit more complicated obviously if they’ve got only a percentage of the company. So it really depends on the shareholding of the company and mortgage lenders will look at that and analyse that and make the decision based on the shareholding of the company. The income that mortgage lenders will take into account for a director of a limited company will take into account several components.
One net profit, two directors remuneration, three depreciation and four interest paid on loans releases. Now they will deduct loan commitments from the allowable figure so if you’ve got you’re paying on loans that figure will be deducted and that monthly commitment will be deducted from the allowable income that’s taken into account. If you are applying there is a list of documentation that you need to provide and that is two years certified accounts and that’s got to be certified by your account.
Two years chapter four self-assessments that’s the actual document from the revenue commissioners noting the interest or sorry the income that was paid to you for that year. Two years form 11 tax computation so that’s the under the bonnet workings of that notice of assessment that’s a self-assessment chapter four from revenue. The tax computation details your income and details all your expenses your allowable expenses it shows everything as say the inner workings of the tax computation made by your accountant.
Pay your taxes – the amount you claim is what banks will consider
You also need to produce your most recent tax clearance cert and six months business bank statements showing your income that’s coming into the into the business. Last thing I would say about self-employed applications and again, it’s another thing that we see quite regularly particularly for people who are in a startup maybe in the last year or two, is they want to apply for a mortgage they want to get approved and year one they’ve shown a very small income and you know it’s a start-up, so it’s bound to be small income and they might be trying to get the business established so the person will take as little out of the business as possible to to get it running up and running, and but in year two they’re then trying to get a mortgage approval.
Crawl, walk, run
So they’re trying to maximise their income and you know we see people coming in with a very small income in year one and then in order to get approval they’re going to increase their income by quite a lot and one of the things that mortgage lenders really don’t like to see is somebody who’s earned a very small amount in year one it jumps up massively in year two and you know they can have issues around that so for example somebody says they’re earning 20,000 euros in year one and 100,000 euros in year two mortgage lenders will not take an average of 120,000 euros and they’ll probably pair it right back and closer to the first year than the second.
Why? Because they’re worried that it might not be a sustainable way to run the business, in year three after this mortgage is granted will the person still be paying themselves €100,000? It’s very important that when you’re making your mortgage application that your your business in those two years is kind of steadily growing rather than a quantum leap in in year two, so it’s just a tip for for making a mortgage application, what they like to see is steady steady build up, and steady growth in the business.
And while we say ‘over the two years’, really most important thing is that it’s a growing business at it at a steady rate rather than a quantum leap let’s say in in year two so for anybody who’s applying and has been trading for many years, I don’t see that there’d be any problem because they should have a regular steady growth in their business business should be doing well if it’s well established. So being self-employed shouldn’t be the big drama that’s sometimes made out to be, and it should be straightforward, obviously the difficulty for the self-employed is if you’re trading two years or just a little bit less than that yeah that’s always the the tricky part. So that’s my tips today for anybody who is self-employed, and if you want any more details get in touch, call or fill in an inquiry or go ahead and make an application and we’ll assign you a broker.