5 Myths to ignore (& 5 helpful truths) when preparing a self-employed mortgage application

A deal can often be done, it's all about knowing where to look.

Mon 24th June 2019

5 Myths to ignore (& 5 helpful truths) when preparing a self-employed mortgage application

Does your heart sink whenever you get a complex self-employed case? 

As a Mortgage Broker you’re always keen to help – your business depends on it – but the fact of the matter is that many lenders remain wary of self-employed borrowers. This often translates into rigid and inflexible lending policies meaning that the time and effort needed to prepare a watertight case often eats into your margins (not to mention your family/personal time…)

It doesn’t need to be like this, a specialist lender will always guide you through the process personally if that’s what you prefer. There are some myths to dispel and some universal tips and pointers to share to help you prepare your case, speed up the application and improve your client’s chance of success.

Myth 1:  Income must be assessed solely on the applicant’s salary and dividends

The truth: Income can also usually be assessed based on the applicant’s share of pre-tax net profit in the limited company, as well as the salary they earn.

Handy tip:  This figure will generally be shown under a heading: ‘Profit on Ordinary Activities before Taxation’ or ‘Operating Profit before Taxation’.  This is then ordinarily added to the salary that the director earns (found under the heading: ‘Administration Costs’ Or maybe ’Outgoings’.)

Myth 2: Declining/fluctuating turnover or profitability is an insurmountable barrier to getting a mortgage if you’re self employed

The truth:  Realistically, being self-employed is virtually guaranteed to bring a mixture of good and weaker years.

Handy Tip:  Flexible lenders take a pragmatic view of income fluctuations and do lend where income has reduced, as long as there is rationale for the change.  The key is to be prepared to satisfy them that the business will sustain future serviceability – prepare your case with this information to hand and you’ll stand a good chance.

Myth 3:  It’s impossible to extract the relevant information for your client from accounts submitted by a limited liability partnership

The truth: It’s eminently possible but it’s all about knowing where to look…

Handy Tip:  Look for a heading which says ‘Net Profit – Divisible as Follows’ or similar, which should confirm the share of the partnerships profit that your client is entitled to.

Myth 4:  There’s no way forward when the accounts relate to a period which ended some time ago (and especially when they are over 12 months old)

The Truth:  The accounts can often be supplemented with additional information to enable a balanced decision to be made

Handy tip:  Ask the accountant to provide projections based on turnover and profit to date or consider obtaining management accounts.

Myth 5:  You’re on your own

The Truth: Niche lenders are set up with underwriters with experience in interpreting these accounts

Handy tip:  Just ask the question.  if you get an otherwise good applicant who has accounts which you don’t quite understand, or which don’t seem to quite tell the story that the applicant is describing speak to an experienced underwriter who regularly reviews and interprets company accounts

So - if this sounds familiar - get in touch - even if it's just to clarify a couple of key points or share your experiences - we'd love to hear from you      Contact us now

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