Agreement in Principle Self-Employed
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Agreement in Principle Self-Employed
Richard Grigg explains how an Agreement in Principle works if you are self-employed.
Can you get an Agreement in Principle if you’re self-employed?
Absolutely. The big message is that the self-employed are people too. Just because they work for themselves rather than for somebody else, a mortgage Agreement in Principle is still very much available.
Is it harder to get an Agreement in Principle if I’m self-employed?
It probably is slightly more difficult if you’re self-employed. It does very much depend on the circumstances.
If you’re self-employed with 30 years experience, you’ve been trading for 20 years and your net profit stays pretty much consistent, you’re no different to someone who’s employed.
If you are in your first year’s trading, that’s slightly more difficult. It can be a little harder to get an Agreement in Principle in that first year of trading.
But typically for a lot of people, once you’re up and running, your profits are consistent and the business is consistent or growing, there’s little barrier to that Agreement in Principle. In some cases, it actually works better for the self-employed than for an employed person.
How is self-employed variable income assessed for an Agreement in Principle?
Variable income is probably where self-employed people come out better. You might take a lot of seasonal business, if you work outside or you are busier in the summer. You’ve got longer working hours and the weather doesn’t handicap the work you’re trying to do.
Those who do a lot of overtime on an employee basis see peaks and troughs throughout the course of the year, and that can have an impact on a mortgage. Whereas if you’re self-employed, your accounts are done every year. The peaks and troughs are less relevant and it’s an easier set of figures for a lender to assess.
Can I use more than one source of income when I apply for an Agreement in Principle?
Whether you’re employed or self-employed, we will always look to include any income to put you in the best circumstances. You might be self-employed as a sole trader or working through a separate limited company – even if that’s alongside your day to day job.
As long as it’s feasible in terms of the number of hours that takes up and it’s not overbearing, we can look to use that. You might be a landlord, where you have a self-assessment tax return to file every year. Certain lenders are always more generous when it comes to using the profit from land and property.
How is affordability calculated for an Agreement in Principle for self-employed borrowers?
If you’re employed, lenders base their decisions on your annual gross salary, and when you’re self-employed they are looking at that annual tax return.
In theory, affordability should be like for like. But the self-employed can have big variabilities across the market as lenders assess that income in a variety of ways. It could be the lowest of the last three years’ accounts, while some lenders on our panel will look to take the gross profit of a limited company.
So there could be huge swings in what would be available to you in terms of borrowing. The numbers underneath are exactly the same, but it’s how each lender interprets those figures and how they assess your income. That can have a huge impact on the self-employed.
Getting a broker that understands that and has scale across the lender market is crucial.
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Come on in and be quite forward with what you’re after – just be very honest with your mortgage broker. It’s good to make sure that we know absolutely everything about you. That way we can’t be blindsided by a lender. An open book policy is very good when coming to see your mortgage broker.
What information do self-employed borrowers need to provide when applying for an Agreement in Principle?
Again, that very much depends on the type of self-employed person we have in front of us.
If you’re a relatively new sole trader or partnership business, maybe with only one set of accounts, lenders are going to look for consistency in that business. They might be looking for that first year’s tax return, along with business bank statements to make sure things are looking similar to the year. That gives them reassurance.
For somebody more established, we’d be looking at two years’ accounts to show that consistency year to year.
With a limited company trading as its own separate entity, we will be looking for a year or two years of the director’s self-assessment tax returns and company accounts. Typically, we would also require three months’ bank statements to get a good understanding of whether that business’ current trading is similar to previous.
When we’re looking at that, the more information we have, the better. If I’ve got a client who’s been self-employed for four or five years, and last year was particularly poor, we can see that it was a one-off. It was a dip compared to the years on either side.
Or perhaps they did as the government suggests and bought new machinery or some kit that brought their profits down. Again, we can see where that money’s gone. A lot of lenders will take a view on that individual basis, as they can see the client is bettering their own business.
How long is an Agreement in Principle valid if I’m self-employed and my income changes?
The Agreement in Principle is as valid as the information that’s been used to generate it.
Timing is massively important when it comes to self-employed applicants. We might be doing an Agreement in Principle in the middle of a year – you’re quite a long way from the end of the previous tax year and still a good six months away from the beginning of the new tax year.
Ideally the income won’t have changed dramatically over that period. At the end of your tax year, the history doesn’t necessarily represent the future going forward. So we’ll use the two years’ accounts as an average. As long as the business isn’t changing day to day, the Agreement in Principle will typically be valid for 30 to 90 days – depending on the lender that we’ve used.
But the reverse is also true. Perhaps we’re looking to do an Agreement of Principle in March, they’ve had a really good tax year and we’re expecting a better set of accounts come April. Whilst the Agreement in Principle would still be valid in April, it’s worth revisiting to see if we can get a better set of terms or a larger loan once the latest accounts are produced.
Will I need a credit check? Does a Decision in Principle affect credit score?
Yes. Every lender will require a credit check. It will typically be a soft credit check with the majority of the lenders, which means it won’t have any impact on your credit score.
For people who’ve had previous credit issues, lenders still do a soft credit check, but they will also look at the file rather than the score.
They’ll be using the credit check to look at all the data, rather than a computer making a decision based on scoring alone. That’s crucial for a lot of people. You may be concerned about it affecting your credit score, especially if you’ve had some issues in the past.
We will always make a client aware if any credit check will leave a footprint on the record. But you aren’t just your credit score – and the information behind that can help.
How do I apply for an Agreement in Principle if I’m self-employed? How long does this take?
The thing is that there’s a wealth of ways lenders how they assess income. I think a broker is even more crucial for people who are self-employed because we know which cases will do better with certain lenders than others.
In getting an Agreement In Principle, we would usually get a decision within 24 hours. The bulk of the time is getting that client file in front of the right lender to get the right decision. That will come from a conversation where we go through the details to make sure you have a good understanding of what you’re going into, especially if you’re a First Time Buyer.
It’s also to get a good understanding of your business, because ultimately it’s something you’ve built and you’re proud of. It means we can get you the right lender to do what you want, based on your accounts.
If you were to look to do it off your own back, you will get a plethora of responses depending on who you speak to. But a broker will just get it done in one go. You’ve got one appointment, where we get an understanding of how that business works.
Ultimately we work for you. We’re on your side, not the bank’s. We’re there to get the very best answer for our client. If you need a bigger mortgage than you’ve been offered elsewhere, it’s about getting that with the right lender.
We just give you a simple approach across a large volume of lenders, which is important as there’s so much variation in how they assess self-employed income.
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