You are dreaming to buy your home, however you think as a business owner there is a little chance or even no chance for you of being accepted for mortgage. So, I spoke to mortgage advisor about steps to help you get started.
We will look at main three areas: credit history, income and deposit, how to get a mortgage for business owners.
CREDIT HISTORY
Lenders will look at your credit history when they calculate your credit score, which will show them the level of risk in lending to you. If you wish to secure a UK mortgage, first you need to meet basic requirements such as:
- Lived in UK more than three years.
- Be registered on electoral roll.
- Have a UK bank account.
- Have a permanent job in the UK with verifiable and taxed earnings.
- Make sure liabilities are paid on time such as credit cards, loans, car finance, bills, property rental.
There is no 'magic' credit score number that will guarantee you approval, however the higher your credit score, the better your chances of being accepted for a mortgage. You can check your credit score for free on CHECKMYFILE website. Remember, your credit rating isn't set it stone – it’s a living, breathing thing that can change with certain kinds of financial behaviour. So, it can go up or down over time.
INCOME
Before applying for a mortgage, you need to think about more than just whether you can afford the monthly repayments. Mortgage providers will look at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change.
Lenders use complex calculations to arrive at the maximum they will lend. You can do a rough calculation by multiplying your gross income (income before tax) by 4.5.
As a business owner you run your business as a Sole trader or as a Limited company.
| SOLE TRADER | LIMITED COMPANY | |
| Legal Entity | If you’re a sole trader, you run your own business as an individual. | If you run business as a private limited company, this means the business is a separate legal entity. You are a shareholder; you hold all or a proportion of the company's share capital. |
| Employment Status | You are working for yourself; this means you're self-employed. | You serve the company as its officer as a director, so you are taking money out of the company as a salary, this means you're employed. |
| Income Calculation | Self-employed do not get salary, their business profit is treated as income. You work out your profits by deducting your expenses from your self-employed income. | Director gets salary, therefore gross pay is treated as income. As a shareholder of LTD, you might have income in the form of dividends. |
| Proof of Income | Minimum 2 completed year’s Net Profit history (average taken) HMRC SA302 Tax Calculations and Tax Year Overviews proving Income Tax and National Insurance has been paid to HMRC. | Company Director with >25% shareholding, has to prove 2 completed year's HMRC SA302 Tax Calculations and Tax Year Overviews including annual salary gross and dividend received (average taken). Also, company accounts for last two years. |
It’s important that you think ahead and plan your personal finance. The advantage of having a business is that you can manage your income.
MORTGAGE DEPOSIT
You will need a deposit to buy a UK house. Depending on your income, credit commitments, number of dependents (children under 18 and adults) and past credit history, this will vary between 5 % and 15% of the purchase price for a residential home.
All or part of your deposit can come from a person not named on the mortgage this is called a gifted deposit. The important things to keep in mind about gifted deposits are::
- Lenders mainly accept gifts from your immediate family (Mother, Father, Brother, Sister, Son or Daughter).
- All people gifting funds must be prepared to sign documents from lender confirming funds. Also, they will have to provide identification and bank transfer documents showing funds leaving their account and arriving in your accounts.
Remember, never include unidentified funds into your account as part of your deposit unless you can show supporting documentation.
Other things to consider
You can apply for a mortgage directly from a bank or building society, choosing from their product range. Or you can use a mortgage broker, who can compare different mortgages on the market, and they can offer loan and rate options that a traditional bank may not be able to.
Mortgage broker act as the bridge between you and lenders. The broker's job is to work on your behalf with several banks to originate loans, help you connect with a variety of lenders who best fit your financial situation, gather paperwork, pull your credit history, verify your income and manage the entire purchasing process.
Accountant act as the bridge between business owner and broker or bank. The accountant’s job is to prepare business accounts, gather documents such as bank statements, SA302, proof of income, company full accounts. The accountant can assist you with financial planning so you will know how your business is doing and how much cash is available. Therefore, accountant can help you to implement strategies to improve your personal income.
Buying your first home is one of the biggest financial decisions you’ll ever make. You can achieve your plans for your dream home by good planning and working together with a mortgage advisor and an accountant.
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