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Sole Trader Mortgages

Are you a sole trader who is looking to get a mortgage for your new property? Then check out this guide that discusses Sole Trader Mortgages.
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Running a business as a sole trader has its advantages, especially when you consider the difficulties involved with managing, for example, an LTD company.

After all, you get to be your boss, and you can manage everything about the business without having a lot of additional accounting requirements that may come with a LTD company.

That said, not everything is easy regarding being a sole trader. And getting a mortgage is one of the most challenging tasks.

While it may look simple at first, getting a sole trader mortgage can be a complicated process, especially if you are not that well-versed.

But don’t worry; we have discussed everything you need to know about sole trader mortgages in this guide.

Let’s get started!

Sole Trader Mortgages

Sole Traders Mortgages

As we have mentioned before, sole traders are individuals who run a business by themselves. It can be essentially considered a form of self-employment, where you start working for yourself. 

You can have multiple customers simultaneously and charge a fixed price for your products and services. Besides, you take sole responsibility for the success or failure of the business.

This means that you can claim all the business profits for yourself. The opposite is also true, which means that if there are any losses, you will have to bear them on your own.

Likewise, you must pay for all the business expenses and debts like rent, equipment, mortgage and others out of your own pocket.

Because of the above reasons, a sole trader’s income is prone to frequent fluctuations. For instance, you may make a large profit in one month, and the business may sustain a loss the next month.

That naturally gives rise to financial uncertainties, which is why sole traders find it difficult to get mortgages.

However, this does not mean that such individuals won’t be able to get a mortgage at all. If you follow certain guidelines and provide the relevant documents, you can meet the lenders’ criteria to attain a mortgage.

How Long Do You Need To Be A Sole Trader?

When it comes to self-employed professionals like sole traders, mortgage lenders typically require at least two years’ worth of accounting details. Therefore, in order to get a mortgage, you will need to have worked as a sole trader for at least two years.

Of course, if your trading history is more than two years, then it is even better. Usually, lenders take a look at your financial credentials, such as income and profits, for the past few years and generate an average based on those figures. It helps the lenders to determine whether you will be able to afford the mortgage. 

That is why having a long trading history is in your best interests. After all, the more income and profits you can show, the higher your averages will be, ultimately assisting in securing the mortgage.

On the flip side, if you have a trading history of less than two years, securing a mortgage as a sole trader may be difficult. With that being said, some specialised lenders can offer mortgages to sole traders who have a trading history of one year.

Documents Required For Sole Trader Mortgages

If you wish to apply for a mortgage as a sole trader, you must provide the following documents to prove your financial records. 

1. SA302 Forms

This is possibly the most important financial record you must provide as a sole trader to the lender. The SA302 form summarises the income you reported to the HMRC (His Majesty Revenue & Customs) via self-assessment. 

As such, the SA302 allows the lender to evaluate your mortgage affordability. You can download and print the SA302 through HMRC’s online services or via commercial software.

This will be accompanied by a corresponding Tax Year Overview (TYO), which shows if the tax due has been paid or not. Lenders are aware and are usually okay with the tax not being paid but not due the following January. 

2. Certified Accounts

In addition to the SA302 forms, you may need to provide all the certified account documentation for at least the past two years. This is to help the lender verify your financial records so there are no issues or discrepancies later.

Mortgage lenders can determine whether you can pay the mortgage by assessing the profits and revenue details in the account records.

Please note this is extremely rarely looked at for a sole trader. Sometimes, if an accountant completes these for you as a sole trader, these can accompany the SA302 and TYO. 

3. Other Documentation

You must provide some other documents to the lender to get a mortgage. These documents are:

  • Proof of identification
  • Proof of address
  • Bank statements

The above documents are required to perform a full assessment of the borrower. For proof of identification, you can furnish your passport, driving licence or any other official document with your photo on it (please ensure it is in date and has all the correct details). 

As for the proof of address, you can provide documents such as utility bills or council tax bills. And lastly, there are the bank statements, which need to be furnished for further financial verification.

Most lenders will ask you to provide bank statements for the past three to six months at least.

How Are Sole Trader Mortgages Assessed?

How Are Mortgages Assessed

When you apply for a sole trader mortgage, it will be assessed based on the following factors.

1. Loan-To-Value

The loan-to-value (LTV) ratio is often used by lenders to calculate the financial risks associated with a mortgage. This ratio compares the amount of money being borrowed to the value of the purchased asset. 

Generally, a high LTV ratio indicates greater risk and vice versa. This means finding a lender for a high LTV property may be extremely difficult unless you provide a large deposit.

2. Income And Affordability

The primary goal of a lender is to minimise the risks associated with the mortgage. They can determine if you can afford the mortgage by assessing your income. 

This is true not only for sole traders but also for everyone else. After all, if your income is too low, you may encounter financial troubles down the line, affecting your ability to pay off the mortgage.

Most lenders require sole traders to provide documents like SA302 and account records. It enables them to evaluate your income and financial capabilities extensively. And once they are confident that you can afford the mortgage, your application will be approved.

3. Credit Scores

During the mortgage assessment process, the lender checks your credit score and profile via your credit report. If you have unpaid debts and pending credit card bills, your credit score may be low.

That will subsequently affect your chances of getting a mortgage approval since it will increase the risks for the lender.

Frequently Asked Questions

1. Are Sole Trader Mortgages Commercial In Nature?

No, sole trader mortgages are not considered commercial mortgages since they are not used for purchasing business properties. Instead, they are the same as regular residential mortgages that most people get. 

2. What Are The Rates For Sole Trader Mortgages?

Since the mortgages for sole traders are the same as the current mortgage products offered by the lender, the interest rates are similar in comparison; it is just the lending criteria the sole trader needs to meet.

So, unless there are issues with your financial records, you must pay the same mortgage rate as a regular home buyer. Some lenders may have a product range which targets self employed borrowers and then specific rates to that range. 

Conclusion

We hope that the information provided so far has helped clear any existing doubts in your mind about sole trader mortgages.

Of course, if you have never applied for a mortgage, we understand that you may still feel a little worried or unsure about it. In that case, we suggest you seek help from a professional mortgage advisor. 

They have considerable expertise in mortgage-related matters, including mortgages for sole traders. So, if you seek their help, they can guide you through the whole process and provide expert advice to improve your chances of getting an approved mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.

CeMAP & CERER Qualified Mortgage Adviser

I am CeMAP & CERER qualified mortgage adviser and have helped a number of clients realise their dreams when they thought it would not be possible. I’m skilled at getting mortgages sorted for people with a history of missed payments, CCJs, defaults, debt management programmes, IVAs and bankruptcies.

Mortgage & Protection Advisor |  03337892035

I am CeMAP (Certificate in Mortgage Advice and Practice) qualified mortgage adviser with a strong background in Finance. I specialise in providing expert advice on a range of mortgage products, including first-time buyers, remortgages, buy-to-let mortgages and bad credit mortgages.

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Are you a sole trader who is looking to get a mortgage for your new property? Then check out this guide that discusses Sole Trader Mortgages.
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