DO YOU ASK CLIENTS IF THEY ARE HAVING ANY THOUGHTS OF A MORTGAGE IN THE NEXT YEAR OR TWO?
Applying for a mortgage has changed over recent years – dramatically. Self-certification is no longer available and The Financial Conduct Authority issued new rules in 2014 concerning affordability and the proof that’s required. So, how do today’s conditions affect the self-employed?
There are 3 main areas of change:
Advice can only be given by an approved mortgage professional.
The mortgage must be affordable, now and over the next few years should interest rates rise. (CLICK HERE to see what happens if rates rise).
Applicants must show proof of their income and expenditure.
For the self-employed, the proving of income can create particular difficulties (a director of a limited company with a shareholding of 20% or higher is usually considered self-employed). SA302’s and Tax Year Overviews are often now required in lieu of accounts to prove personal income; one, two or three years depending on the lender and the applicant’s circumstances, alternatively, an accountant’s certificate can be requested.
The devil is in the detail and its complex because different mortgage companies accept different incomes, with drawings/net profit/dividends and any other source of income being used in different combinations by different lenders (of course, a partners income will also be taken into account if they are a party to the mortgage).
Self-employed/small business owners can be asked to provide any or all of the following:
1 – 3 years HMRC SA302’s + Tax Year Overviews
1 – 3 years accounts or an accountants certificate
1 – 3 months personal bank statements
1 – 3 months’ payslips
Documented proof of where the deposit comes from.
Spending habits are also put under a microscope with questions about regular outgoings such as food, household bills, childcare and leisure activities, plus the usual questions about loans and credit cards. Personal bank statements will have to be shown as evidence of outgoings and also as proof of income received.
So, what can be done to boost the chances of getting through the new rules successfully?
Planning and preparation is the key.
The first thing anyone who is unsure of their credit rating should do is get a copy of their credit report.
If this shows a high score that’s the first hurdle cleared. However, if the score is less than perfect, it’s not time to give up, because although it's true that the high street banks and building societies reject people because of their reliance on automated credit scoring systems, there are other very good lenders, including some of the smaller building societies, who will look at each application individually.
Applicants should think about taking simple steps to maximise their credit rating; make sure they are on the electoral roll, ensure all bank and card accounts and loans are registered to the same address, and close old unused accounts. Pay down debts if necessary. Their file needs to show a consistent track record of good money management.
Transferring credit card balances to keep interest payments down is a smart way to manage money, but if the old credit card isn’t closed the total amount of credit available could make an underwriter nervous. Exposure to several large credit card limits could mean the difference between a pass and a fail.
It is also important to be aware that too many searches leaving footprints on a credit file and can lower a score. Getting multiple quotes through comparison websites such as Money Supermarket will create multiple footprints on a record.
It can be important to look carefully at finances in good time, well before actually applying for a mortgage. To borrow as much as possible it can pay to cut spending, where possible, over several months before an application is submitted. A well run bank account is what lenders like to see.
Unless someone is applying to their own bank and are completely confident of a successful outcome, it might be best to consider going through a mortgage broker. Whole of market brokers don’t just shop around for the lowest rates, they also know how to match an applicant’s financial profile and requirements to the right lender.
Success boosting tips:
Having professionally prepared accounts available can be important, preferably showing stable or increasing profits.
If a credit report is less than perfect, everything possible should be done to maximise the score before beginning. (CLICK HERE for more information on managing credit).
It can pay to cut out unnecessary spending well before applying, if necessary, to make sure bank statements show several months of good money anagement.
Think about using a mortgage broker
With the time it can take, it pays to have a mortgage pre-approved with a “decision in principle”. This means that subject to a suitable property valuation, potential pitfalls can be avoided and making an offer on a property can be done with the confidence that a mortgage can be obtained.
KMA Finance is happy to give advice and apply for decisions in principle on behalf of both existing and new clients at no charge.