A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Obtaining a mortgage as a sole trader can be a straightforward process, although it’s not always guaranteed. It’s crucial to note that the market is saturated with various lenders, each specialising in different types of mortgages, including those tailored for bad credit or the self-employed mortgages.
However, it’s worth noting that certain lenders may be more apt for sole trader mortgages, while others may be better suited for direct mortgages, and vice versa.
Choosing the right lender is pivotal in the successful acquisition of a mortgage. This article aims to provide useful insights and offers other valuable tips for sole traders navigating the mortgage application process.
Definition of a Sole Trader
A sole trader, also known as a sole proprietor, is an individual who runs a business as an individual, taking full control and responsibility. Unlike larger businesses with multiple owners, a sole trader operates as a single entity.
For many sole traders, the dream of homeownership is a significant milestone. However, the traditional mortgage process may present hurdles unique to their entrepreneurial status. Understanding these challenges is crucial for navigating the path to homeownership successfully.
How Long Must Sole Traders Operate Before Being Eligible for a Mortgage?
Typically, a minimum of 12 months is required in most cases. However, by enlisting the assistance of a broker, it may be feasible to identify a specialised lender willing to initiate the initial stages of your application slightly earlier than this time frame.
In order for a lender to assess the annual income of a self-employed borrower, a well-documented and substantiated trading history is essential. In the pre-regulation era (and during the credit crunch), borrowers could self-certify their income, stating their earnings to the lender without providing proof of affordability.
This practice led to many individuals borrowing amounts that were not realistically sustainable and played a role in the market’s decline.
Which Documents Are Required For Sole Trader Mortgage Application?
Primarily, you will need your most recent tax returns, typically provided as an SA302. This document can be obtained by downloading it from HMRC’s online portal or requesting it by post.
In addition to the aforementioned paperwork, most mortgage providers will also request the following documents:
- Proof of address
- Photo ID
- Bank statements
- Credit reports
How Sole Trader Mortgages Are Assessed
Securing a mortgage marks a substantial stride towards owning a home. Yet, self-employed individuals including sole traders often encounter common mistakes when applying for a mortgage, leading to potential drawbacks or adverse outcomes.
It is important to understand how sole trader mortgages are assessed to fully prepare yourself for a self-employed mortgage. The eligibility criteria for a sole trader mortgage are assessed based on the factors below:
1. Loan to value/deposit requirements
If the loan is deemed affordable, then the amount of deposit required is almost always the same for sole traders and partnerships as it is for employed applicants. Most mortgage lenders will require at least 5%-10%.
The exception here is when some lenders offer more flexible underwriting for those who have circumstances that fall outside standard lending criteria, and these products demand a higher deposit than for other deals offered to those meeting the standard criteria.
2. Sole trader and partnership mortgage affordability
Mortgage lenders will work out on how much you can borrow based on the following:
a. Trading history
Most lenders require 3 years of trading history before they will consider the applicant’s income stable enough to lend on. Some are happy with 2 years of self-employed accounts for a mortgage application, and others will accept sole traders and partnerships who have only been running for 12 months.
b. Income multiple calculation
Every lender varies in the way they calculate sole-trader incomes, and also in the amount they are prepared to lend based on these incomes. Typically, 4.5x income is an average benchmark, with some lending 5x and even up to 6x income for certain borrowers.
It is possible to exceed 5x income for those refinancing and looking to borrow more money, through some specialist secured loan/second charge mortgage lenders. Using the 5x income calculation, this is how it would work:
– Sole trader mortgage calculation:
Max loan = (Net profit or “total income received”) x 5
– Partnership mortgage calculation:
Max loan = (share of net profit or “total income received”) x 5
– Ltd company mortgage calculation:
Max loan = (share of net profit or salary + dividends) x 5
Am I Eligible For a Sole Trader Mortgage If I Have a Poor Credit History?
There is a common misconception that having a bad credit history will automatically disqualify individuals from obtaining a mortgage, but this is not entirely accurate. Specialised mortgages for individuals with bad credit are available, as long as you know where to search.
While certain lenders may approach lending to customers with adverse credit with caution, many are open to considering the circumstances surrounding the specific instance, how long ago it occurred, and how you’ve managed your finances since then before reaching a decision.
But the nature of the bad credit also plays a role, some lenders may be willing to overlook less severe cases, such as the occasional late payment or default, whereas repossessions or bankruptcies may be viewed more seriously.
Seek For Professional Help!
While securing a mortgage as a sole trader is not an insurmountable task, it’s advisable to seek guidance, especially if your circumstances are unique. Whether you’re a first-time buyer or have recently transitioned into sole trading, engaging the services of a broker can prove beneficial.
Are you on the daunting journey of securing a mortgage and finding yourself overwhelmed with the intricacies of the process? Look no further than Your Mortgage Expert consulting services, your guiding light in navigating the complex world of mortgages.
With a team of seasoned professionals, we pride ourselves on offering tailored solutions to meet your unique financial needs. Our experts are well-versed in the ever-evolving mortgage landscape, ensuring you receive up-to-date advice and assistance.
Can sole traders qualify for mortgages in the UK?
Yes, sole traders can qualify for mortgages, but they may face unique challenges compared to traditional employees.
How can I improve my credit score as a sole trader?
Improving your credit score involves paying off debts, addressing credit report issues, and maintaining responsible financial habits.
Is it essential to work with a mortgage broker as a sole trader?
While not mandatory, working with a mortgage broker can simplify the process and increase your chances of securing favourable terms.
What documentation is needed for a sole trader mortgage application?
Documentation may include business financial statements, tax returns, proof of income, and other financial records.
Luca BertolinoMortgage Expert
Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.