FTB couple: One employed, one self employed

littlesaint

Hello, I just need some advice about mortgages. My husband and I are hoping to buy our first home next year. Because we both work in London we will probably only get at 2-bed place for our budget in outer London. The asking price of a property in our neck of the woods is about 270 - 280K, though they usually sell for about 250K, which is our Maximum budget.

We already have saved just over 30K between us and with more saving and promised help from our families we should be able to save a 50 - 60K deposit. We earn about 60K between us based on my husband salary and my projected earnings from self employment for 2011/12.

I have spoken to our bank about how much they will lend us based on a 50K deposit. Based on what I told them they would only lend us enough for a 220,000 property or a 240,000 with a 60K deposit. We'd have to drive a pretty hard bargain to get a place for that amount in this area.

The main sticking point seems to be my self employment. I have proof of earnings from the HMRC, even though I have been trading for only two years. I realise they only consider your net salary but when I put my net earnings in mortgage calculators as a salary they deliver very affordable mortgage - about £100 less than we pay in rent. They deliver no results when I tick the self employment box.

I just wondered what I could do to improve our position. Obviously, saving a bigger deposit will help, but I am not sure whether we will be able to save much more than 60K, especially now the stamp duty holiday holiday end could increase costs. Would it help if I got an accountant to sign off this years accounts which I will do in April/May?

Thanks in advance.

GMS

You would probably benefit from using a broker.

What is the income split?

How long trading and how many years verified returns do you have?

littlesaint

Thanks for your response.

It's roughly a 50/50 split. He earns £31K pa and I have earned more than £21K by mid Dec so project that I will earn £28/29K by the end of March. I don't think it is too optimistic because February/March is often my busiest period because it is the end of the financial / holiday year for most clients.

I've been trading "seriously" for two years. Last year I earned £24,000 and the year before I worked part time and freelanced part time so I think it was only about £10K from self employment. I have accounts and SA302 for both years and will get one for this year when I file my tax return. I have not used an accountant before but will probably use one this year, especially if I am trying to apply for a mortgage.

GMS

An accountant is not essential for a mortgage application, the SA302's will be sufficient for proof of earnings. Will do no harm to have an accountant though.

Some lenders insist on 3 years returns, some 2 and a few will accept 1 year.

If you use a broker it will save you time searching about. If you apply directly make sure you discuss with the lender before application as you do not want to apply and find criteria cannot be met.

littlesaint

Thanks for the advice. I will look into finding a mortgage broker. Is there anything else I should be doing to improve our prospects in the meantime? Other than saving like mad! Neither of us have any debts and both have a good credit history.

kingstreet

When you talk about your earnings, what exactly are you referring to?

Lenders use net profit. This is your gross profit, less capital allowances but before personal tax allowances and tax deductions.

You really need two years solid net profit figures to get this income taken into account. Some lenders will accept SA302s in lieu of accounts, but others will request an Accountant's Certificate so having an accountant may open up more doors to you.

I agree with what GMS has said. An independent or whole market broker will help you plan for what you will need in advance of an application for a mortgage. Avoid estate agency advisers as most (big chains in particular) have small panels of lenders, charge fees and receive commission from their few lender options.

littlesaint

kingstreet wrote: »

When you talk about your earnings, what exactly are you referring to?

Lenders use net profit. This is your gross profit, less capital allowances but before personal tax allowances and tax deductions.

Thanks. I was talking about net profit - sorry, still thinking in terms of taking home a wage! Though I was assuming that the net profit would be gross profit minus expenses, tax deductions and any capital allowances that I used this year (nothing so far). I take it that from what you are saying this is not the case?

BoGoF

littlesaint wrote: »

Thanks. I was talking about net profit - sorry, still thinking in terms of taking home a wage! Though I was assuming that the net profit would be gross profit minus expenses, tax deductions and any capital allowances that I used this year (nothing so far). I take it that from what you are saying this is not the case?

Depends on what you mean by tax deductions?

The figure used by a lender will that be shown on SA302 before personal allowances are deducted.

littlesaint

BoGoF wrote: »

The figure used by a lender will that be shown on SA302 before personal allowances are deducted.

Ah, so it's just what's on the SA302? Sorry, I find some of these details very confusing but I guess I'm going to have to get grips with it.

GMS

The figure the lender will use is the figure you are liable for tax on, i.e turnover minus allowable expenses.

It would be unfair to use the figure after you have paid tax as an employed person can use their gross salary, i.e figure before deductions.

If your turnover was 40k, with allowable expenses of 15k then you would use 25k as your income figure. The SA302 will show what was submitted to the revenue

littlesaint

That's really good to know. I was assuming that it was after tax was deducted, which I felt was a bit unfair. Thanks for everyone's help. I feel a lot more positive about things now. In the meantime I will look into getting an accountant to do my tax return this year.