A sole trader is someone who runs their own business and are self-employed. They are able to keep all the post-tax profits from the business, but it means they are also legally responsible for all aspects of their business and personally liable for the finances of the business.
Many sole traders will approach their high street bank and be declined or told they don’t qualify for a mortgage. This does not necessarily mean you won’t be able to get a mortgage at all, and it’s about finding the right lender and the right type of product. You may require a specialist lender that you can’t access on the high street. A mortgage broker can use their knowledge to help you identify which lender is right for your own personal circumstances and get you the most suitable deal for you.
Can a sole trader get a mortgage?
You may be a sole trader and have been declined a mortgage from your local high street bank or turned away and told you won’t be able to get a mortgage. However, don’t be disheartened as this isn’t always correct. High street banks may have branch staff working there that are only taught to take a certain approach when it comes to calculating affordability that is fine for a standard normal mortgage application but isn’t flexible enough when it comes to calculating for a sole trader’s financial accounts.
Traditional banks are starting to change their approach as a large proportion of the workforce is self-employed and the pool is steadily growing but there are specialist lenders that are not on the high street which can be considered too.
How to get a mortgage as a sole trader?
There are several factors lenders will check for before approving a mortgage. Not all lenders will have the same criteria’s and requirements which is why a mortgage broker might be handy to be able to match which lender you are most suited to base on their experience. An agreement in principle will confirm the mortgage loan offer you are able to receive and it can be handy to have this before searching for a property.
Similarly, to a standard mortgage applicant, a sole trader will be required to go through the standard checks, such as income assessment, affordability and checking their credit report.
Sole traders will need to file for self-assessment which can be done yourself through HMRC or hire an accountant which will illustrate your income levels. An SA302 form can be requested once this has been filed. Generally, lenders will require the latest two years of self-assessment although each lender can very between requesting for one to three years of your self-assessment. They will compare the net profit from your business to your outgoings to work out your affordability which will indicate to them how much you can afford for your monthly mortgage repayment and loan you an amount for your mortgage according to this.
Having a healthy credit score is a good indication to a lender how reliable of a borrower you are, so it is a good idea to check your credit score yourself so you can see if there are any discrepancies in your credit history or make improvements before applying for a mortgage. Some lenders may lend to borrowers if they have adverse credit, but this will be judged on an independent basis and will depend on the type of adverse credit.
You will be required to have a deposit just like any other mortgage applicant, and generally speaking you be required to have 5% – 10%. In some cases, lenders may require for you to have a bigger deposit if they are not completely satisfied with your application and having a larger deposit will lower your loan to value ratio (LTV) which is always more appealing to lenders as it is less risk for them to loan for a mortgage.
What documents will be required?
- Wage slips (3 to 6 months depending on the lender) or self-assessments SA302 (2 to 3 years depending on the lender)
- Contracts (12 months) if you are doing contractual work
- Valid photographic ID such as passport or driving license.
- Proof of address such as a bank statement, utility bill or council tax bill.
- Bank statements (3 months)
- Evidence of your deposit
Mortgage for sole trader 1 year accounts
Most lenders will need 2 years of accounts if you are a self-employed sole trader. However, we do have access to specialist lenders and some high street lenders that may be OK using 1 years of accounts. If the sole trader has moved from an employed position in the same line of work previously. Fort example we have done applications for social workers and tradesmen who have been employed in the same field of employment and then went self-employed. As the income was comparable with their previous employed roles then we have got cases agreed on high street lender rates. Of course, we can still get 1 year account mortgages agreed with other lenders even if the income has increased but typically that will be with a non-high street lender on higher rates.
Mortgage for sole trader using latest years income
If the income has increased, then then typical lenders will work off the average of the latest 2 years. However, we do also have some high street lenders that will work off the latest year. If the income has tripled from one year to the next, then a case like this will usually be taken on an average basis with high street lenders. However, if the income has perhaps gone up by 50% from one year to the next we stand a good chance of getting a mortgage agreed for a sole trader on the latest years income even if it has increased.
Mortgage for sole trader verse limited company
Sole trader mortgages using net profit to work out how much you can borrow. With ltd company mortgages the company director’s income is worked out from salary and dividends. Or in some cases salary plus net profit if the director owns 100% of the business.
Sole trader mortgage lenders
Halifax is one of the popular lenders that we use for sole traders with 1 year’s accounts. However, it is very important to present the case to the underwriter is a favourable manner to ensure the understand the income is sustainable and feasible. We have done this with many other applications with Halifax Bank. However we also have other lenders that are more specialist in sole trader.
Santander and Coventry BS will work off the latest years income in some cases.
Getting a mortgage as a sole trader may not be as straightforward of a process when compared to normal standard applicants. Seeking professional advice can help save you time and effort and a whole of market mortgage broker can access a wide range of lenders from the whole of market to recommend you the right deal for your own personal circumstances and help you in starting your first step onto a property ladder. Get in touch with us today to start your mortgage process.
Can I get a mortgage if I am self-employed?
Yes, you can get a mortgage as a self-employed person, but you may need to contact a mortgage broker.
Are sole trader mortgages classed as commercial mortgages?
No, Sole Traders do not fall into the category of Commercial Mortgages because their businesses are usually small scale and therefore don’t meet the requirements of being classified as a ‘commercial property. However, most mainstream banks offer loans up to 80% LVR for sole traders.
Do I qualify for a mortgage if my business isn’t making enough money?
The answer depends on what kind of business you run.
What are the documents required for the loan as a limited company owner?
As a limited company, a mortgage lender will ask for your salary and dividends to calculate your income. It is worth noting here that every lender has different lending criteria in accessing your application.
Do mortgage lenders check tax returns?
Yes, many mainstream lenders also check tax returns while making the decision. To get more details on sole trader mortgages, feel free to contact a market broker who can help you to connect you with a suitable mortgage lender.
Is it difficult to get a sole trader mortgage for a self-employed individual?
Yes, but it depends on the lender to lender. The solution is to contact a specialist broker who can help you with a self-employed mortgage deal by connecting you with a suitable mortgage lender.
What proof of income do I need as a sole trader?
Starting from tax returns, SA302, bank statements etc. It is worth noting here that every lender has different lending criteria in accessing your application.
Are sole trader mortgages classed as commercial mortgages?
Most Mainstream Banks offers loans up to 80% LVR for Sole Traders. So yes, they are considered commercial properties.
How much does it cost me to apply for a mortgage as a sole trader?
It all depends on how long have you been running your business and whether or not you have any other assets such as a car/house etc. You should expect to pay around £300 -£500 of mortgage repayments, depending on where you live.
What is a Joint Borrower Sole Proprietor mortgage?
Joint borrowers are those people who want to borrow together so that one party pays off the debt whilst the other gets some sort of benefit like interest rate reduction. This type of arrangement works well for married couples looking to buy a house together. If both parties agree to this, then there is no problem getting a joint mortgage. But if only one partner wants to take out a joint mortgage, then he/she needs to find someone else to co-sign the agreement.
What is a self-certification mortgage?
Self-certification, or self-cert mortgages, help individuals to borrow money to buy a property without having any proof of income.