When you are applying for a mortgage, usually the lender will focus on your financial history over the past 2 years. For employees, that means 2 years of personal income tax returns, as well as W-2s and paycheck stubs. If you are self-employed, that changes the usual process a little. For one thing, you probably won't be able to provide W-2s or paycheck stubs.
Many lenders specialize in working with borrowers who are self-employed. It's worth your time to shop around for a lender you're comfortable with, who has done this type of loan before. Be aware that it may take a little longer and involve a bit more paperwork, but mortgages for self-employed people are approved every day.
By the way, you may be surprised to find that you fall into this category. If you are employed by a business that you own 25% or more of, you're considered self-employed. If you own a construction company equally with your 4 siblings, you own 20% so you're not considered self-employed. If you own the same company equally with 2 siblings, you own 33% so you're considered self-employed.
The lender will be concerned with your financial stability, and the financial health of your business. After all, in this situation, if your business fails, you are likely to default on your mortgage, as well. So, the lender will be checking two sets of documents - your personal financial records, as well as your business records.
You'll need to supply your personal income tax returns for the past two years. If your company is incorporated, you'll also need to supply two years of income tax returns for the business. The lender will often also request a current balance sheet for the business, as well as a current profit and loss statement.
If your credit is good and you don't have any other major loans, the lender may simply work with the first two pages of your personal tax returns for the past 2 years. In this case, your financial history is strong enough that they aren't concerned about the business. However, this is the exception.
The documentation you'll need to furnish, and the way it's viewed by the lender, depends on the structure of your business:
- Sole Proprietor - Corporation - Partnership
Sole Proprietor
As a sole proprietor of a business, you own the whole thing. Your business income and expenses will appear on Schedule C of your personal income taxes. Your taxable income (or net income) is considered your total revenue (or total income) minus expenses.
Corporation
If your business is set up as a corporation, it's separate from your personal income. The lender will need to see your corporate tax returns for the past two years, as well as your personal tax returns.
Partnership
If your company is a partnership, the lender may ask for two years of tax returns from the business. On the other hand, if your credit score is high and your current loans low, again, they may simply work with your personal tax returns.
The amount of documentation necessary can be greatly reduced for those with strong credit scores. Many self employed borrowers, due to their excellent credit, have the ability to state their income, provide limited documentation (3 to 6 months bank statements) or even provide no documentation. As these reduced documentation types add additional risk to the lender, they typically have slightly higher interest rates than full documentation loans.
If you are concerned about paying a mortgage because you are self-employed, a flexible mortgage could be for you. Being self-employed has many rewards, such as being your own boss, but a downside is erratic pay: you can have a month or two without pay, and then the following month have lots of money.
A flexible mortgage differs from a regular mortgage as it allows you to make overpayments, underpayments and take payment holidays, subject to the mortgage agreement.
The flexible mortgage came from Australia in the early 1990's, and in the mid 1990's mortgage lenders realised it would be a perfect fit for many people in the UK who were self-employed, or for people who had irregular work and lifestyle patterns.
A flexible mortgage is now seen as an accepted form of borrowing and is well established in the mortgage market.
Benefits of a flexible mortgage:
- Regular overpayments can pay off your flexible mortgage early and potentially save thousands in interest repayments
- Pay in lump sums on an ad hoc basis
- Interest is calculated on a daily/monthly basis ? with traditional mortgages, most banks and building societies calculate interest payments on an annual basis. At the end of each year, the mortgage balance is assessed and used to reset the interest payments. Daily or monthly interest calculations means less interest paid, and an earlier reduction of the mortgage balance
- Pay less than the normal monthly repayments
- Take a payment holiday ? for example: if your flexible mortgage repayment is ?600 per month, and you have previously made overpayments totalling ?3000, you would be able to have a payment holiday up to five months.
- Borrow money (loan drawdown) ? Borrow extra without additional approval from the flexible mortgage lender, provided the total loan does not go above an overall limit. Alternatively you could ?borrow back? money against previous overpayments. Many customers borrow money to fund home improvements to increase the value of their property.
- No early redemption charges.
Disadvantages of a flexible mortgage:
- You may have to make several overpayments before you can underpay or take a payment holiday
- Making too many underpayments could result in extending the mortgage repayments
- Higher interest rates than a more traditional type of mortgage
- Many lenders will not allow overpayments of more than 10% per year
To choose the right flexible mortgage for you, there are a number of considerations to take into account. Most of them will revolve around the terms and conditions that apply to the additional extras that are offered with a flexible mortgage, namely: overpayments, underpayments, and payment holiday.
Options usually come in a variety of different forms, for example: a payment holiday that has to be earnt, whereas with some flexible mortgage packages it comes as a standard option. It is best to discuss with your lender of the flexible mortgage what exactly the terms and conditions are, as this can throw up many important facts about how flexible the mortgage is.
The primary providers of flexible mortgages are banks, building societies, and specialist mortgage companies. Most mortgage lenders in the UK offer some form of flexible mortgage, such as a fixed, tracker or a discount rate flexible mortgage.
Because the mortgage market has become increasingly competitive, more people are using mortgage brokers, and they are now the largest distributors of mortgage products for lenders. The majority of mortgage brokers are regulated to ensure protection for the borrower.
Although a flexible mortgage is ?a new kid on the block,? it has become an established and respected type of mortgage.
Both Joe Ramirez & Shani Wilson are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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