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    • bobwilson
    • By bobwilson 7th Feb 14, 4:16 PM
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    bobwilson
    Mortgage for Self Employed & How to Prove Income - Help
    • #1
    • 7th Feb 14, 4:16 PM
    Mortgage for Self Employed & How to Prove Income - Help 7th Feb 14 at 4:16 PM
    Hi everyone

    I'm self employed, sole trader and I work from home. I have 5 years accounts & a chartered accountant.

    I've been to countless mortgage lenders and brokers, and chose what seemed to be the best (or "least bad") one. None of them seem to understand self employed accounts.

    Despite what we were told when they drummed up our business, our mortgage broker doesn't seem to understand accounts, and has had to have my accountant explain everything to her.

    She is now insisting on deducting things like depreciation, rent, & capital allowances from my income, to give a MUCH lower (and not applicable) figure for my income. Both myself & the accountancy firm have tried talking to her, but she doesn't seem to understand. My accountant (who's usually very un-emotional) has become exasperated trying to get her to understand the most basic things "It's not rocket science", he says.

    She says things like "I cannot dismiss anything - it is there, it is declared, they will have to deducted."

    It seems she isn't interested in my actual income, but in how much tax I pay. She says "The downside of having a clever accountant is the reduced ability to borrow.". My accountant isn't clever, he's just following HMRC's rules by deducting depreciation etc. It's almost as if she's annoyed my accounts are so tax efficient that she's seeing it as a moral duty to offer less mortgage than I can afford.

    Even if rent from a year ago is deducted from my income (silly as I'm not paying rent anymore and clearly when you buy a house, you pay the mortgage instead of rent), however surely it's obvious things like depreciation in equipment shouldn't be deducted from income. I would have thought a lender would want to lend as much as I can afford, not try to teach me a lesson for being tax efficient.

    The SA302 forms show even less net income because they deduct things like depreciation of equipment from my yearly income, yet now lenders seem to insist on taking the figure on your SA302s instead of your actual income.

    My questions are:

    1. Are there any rules (e.g. set out by the ombudsman) for calculating income?

    2. Are there any mortgage brokers or lenders who are sole trader friendly (i.e. won't deduct depreciation or rent from income), who can understand accounts?

    I appreciate this isn't exactly a specialist forum on the topic, but if anyone knows the answers it would be deeply appreciated. Thanks
    Last edited by bobwilson; 07-02-2014 at 7:00 PM.
Page 1
  • right_track
    • #2
    • 7th Feb 14, 4:20 PM
    • #2
    • 7th Feb 14, 4:20 PM
    If you haven't done so already then call HMRC on 0161 931 9070 and request copies of your SA302 forms for the last 3 years.

    As far as I know, if your self employed this is all most lenders will request, but some may also request copies of your company accounts so best to make sure you have copies of the last 3 years of these as well

    For my affordability my broker just asked 'how much to you pay for this, for this each month' etc. He used my SA302 forms to look at my monthly income history.
    ALL DEBT NOW PAID OFF IN FULL 3 YEARS EARLY!
    Lightbulb Moment Dec 2008 - DFD Nov 2016!
    Debt at lightbulb moment - 9,440.03 - Payplan DMP - 100 per month
    • bobwilson
    • By bobwilson 7th Feb 14, 6:56 PM
    • 405 Posts
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    bobwilson
    • #3
    • 7th Feb 14, 6:56 PM
    • #3
    • 7th Feb 14, 6:56 PM
    The SA302 forms don't show income, they show a figure with depreciation deducted. Such as depreciation in value of equipment, machinery or car. The fact that lenders don't seem to understand how SA302s are calculated is part of the problem.

    Just to further clarify this point, I just copied and pasted this from accountingweb.co.uk:

    "an SA302 is not a useful confimation of income for the self employed as it only shows taxable profits which can often be very different from accounting profits due to Annual Investment Relief for instance.

    Conversely, a business with much disallowable expenditure like entertainment could show the opposite - a higher taxable profit than is actually the case."


    The SA302 does not show income. Are there any lenders who understand this, or are they literally all blindly ticking off paperwork on their tick list?
    Last edited by bobwilson; 07-02-2014 at 7:07 PM.
    • GMS
    • By GMS 7th Feb 14, 7:00 PM
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    GMS
    • #4
    • 7th Feb 14, 7:00 PM
    • #4
    • 7th Feb 14, 7:00 PM
    SA302's are the general way of proving income.

    What sort of figures do yours show for last 3 years? How much do you want to borrow?

    Bluntly put you can't avoid tax and expect to borrow against the higher figure.
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
    • leveller2911
    • By leveller2911 7th Feb 14, 7:36 PM
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    leveller2911
    • #5
    • 7th Feb 14, 7:36 PM
    • #5
    • 7th Feb 14, 7:36 PM
    [QUOTE]
    by bobwilson;

    The SA302 does not show income. Are there any lenders who understand this, or are they literally all blindly ticking off paperwork on their tick list?[/QUOTE

    If your looking to get a mortgage lenders will ask for proof of income and as GMS has said SA302's are the accepted route to prove income for self employed. Don't bother to get ask your accountant to do a "earnings projection" for the forthcoming years as your wasting your time.......

    Its not a problem to prove income via SA302's so long as you filled out your self assessment tax returns....... Which of course you have so its not a problem is it...
    • Thrugelmir
    • By Thrugelmir 7th Feb 14, 8:20 PM
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    Thrugelmir
    • #6
    • 7th Feb 14, 8:20 PM
    • #6
    • 7th Feb 14, 8:20 PM
    however surely it's obvious things like depreciation in equipment shouldn't be deducted from income
    Depreciation is a non cash item. However the asset , what ever it is, is being depreciated over it's economic life span. At the end of which it will require replacing. This will require cash. Even in the form of loan repayments. So the underwriters appear to be taking a conservative view which appears correct.

    Most people are overly optimistic when it comes to finance in particular their own. Lenders on the other hand have to take a more pessimistic view to fulfil their regulatory obligations.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
  • Simon gloster
    • #7
    • 7th Feb 14, 8:24 PM
    • #7
    • 7th Feb 14, 8:24 PM
    If I could multiple thank posts, #4 would get 2,499 from me tonight. That's basically how it works for self employed. Well done GMS you sound like you know what your talking about #cheeky wink#.
    • bobwilson
    • By bobwilson 8th Feb 14, 12:15 AM
    • 405 Posts
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    bobwilson
    • #8
    • 8th Feb 14, 12:15 AM
    • #8
    • 8th Feb 14, 12:15 AM
    I can see from these replies that the problem of a lack in understanding is not just limited to mortgage lenders I am surprised.

    As for assets eventually needing to be replaced, this is again a presumption and not always true. Some assets are optional and some never need replacing anyway.

    Most people are overly optimistic when it comes to finance in particular their own. Lenders on the other hand have to take a more pessimistic view to fulfil their regulatory obligations.

    You can't generalize like this. I'm extremely conservative, all I'm asking is for them to base their decision on my actual income, not on an arbitrary figure (whether you understand accounts or not, it doesn't change the fact that SA302s do not represent income). Our combined income is over 9,000 a month (108,000 a year) and is proven by our bank statements, but the lenders will only give us approx 200k mortgage (around 900 a month mortgage repayments, even at 12% interest rate, the monthly repayments are a small fraction of our income). I never take out credit cards or loans unless I already have the cash, and always save up to pay for things before I buy them. The lender isn't offering me a mortgage based on my income because they don't understand what SA302s are, and don't get accounts. I know I'm not alone in this problem.

    Bluntly put you can't avoid tax and expect to borrow against the higher figure.

    You've just proven my point unfortunately. The attitude of lending should be based on income, not on an attitude of punishment for being tax efficient or legitimately "avoiding tax". Not only is it illogical, it would be dishonest to HMRC to avoid being transparent about capital allowances that do exist. Anyone who suggests otherwise clearly doesn't understand accounting.

    This isn't a case of earning (x) amount and paying 33% tax on (x). There are certain items that are tax free or follow different rules. That doesn't change (x). Taking an SA302 as income is a simplistic and misguided view. This has nothing to do with trying to get away without paying tax you should be paying. Self employed people follow different rules for tax than employed. These rules are set out by HMRC.

    Since this post, I've found accountancy forums where many self employed people and accountants are noticing the same issues with mortgage lenders. It seems it might be a better place to post about it than here. Income isn't a matter of opinion, it's a matter of fact.

    For example, if you can see a person's income from their bank account, that doesn't necessarily mean the same figure will appear on an SA302 as some of it may have tax relief. Does that mean he's deliberately avoiding or evading tax? No. He's just following HMRC's rules. Did they still earn the full amount though? Yes they did, even in the eyes of HMRC, yes they did. If you disagree with this, take it up with HMRC.

    Mortgage lenders aren't offering reduced lending because they disagree with the HMRC's rules, or because they want to punish sole traders. They're doing it because they're ticking off items from a checklist, one of them being the SA302s, even though they don't understand what it represents. To them, it's just a figure in bold. They think it's a way of reducing mortgage fraud because it comes directly from HMRC. However, they don't understand it doesn't represent income.

    This quote is taken from Accounting Web, and sums it up nicely:
    "Problem is that SA302 shows taxable income, I have clients who claim SED so taxable income is nil even if they earned 100k, also non res clients who earn big money but UK taxable income is minimal.(perhaps a forces pension)

    Its problem which is rife in the industry our answer was to suggest clients use a particular mortgage advisor who you recommend,and who understands the problems with SA302. The Banks simply just dont get it."


    Anyone in this forum who disagrees either doesn't understand accounting, HMRC's rules, or the purpose of a mortgage lender. The fact that you don't understand doesn't change the truth. I'd be surprised if there are many (if ANY) accountants who will tell you otherwise. SA302s do not represent income.
    Last edited by bobwilson; 08-02-2014 at 12:33 AM.
    • GMS
    • By GMS 8th Feb 14, 12:29 AM
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    GMS
    • #9
    • 8th Feb 14, 12:29 AM
    • #9
    • 8th Feb 14, 12:29 AM
    Climb off your high horse and answer the question on income. It owuld be much easier.

    I understand your predicament I really do. Self employed do not pay many items an employed person does as it is an expense of the business.

    SA302's are a blunt tool. Agreed. However this is where we are in terms of lending.

    On a separate note why are you not limited? With an income such as your stated one why would your accountant not suggest a limited company so as to minimise your tax liabilities?

    What do your SA302's show and how much do you need? How much would your accounts show as net profit?
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
    • Nebulous2
    • By Nebulous2 8th Feb 14, 8:39 AM
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    Nebulous2
    It's pretty simple really.

    If I am an employee my employer pays all the costs of my tools for the job, all the costs of running a car needed in my job and gives me a salary for my labour. A lender does a calculation based on multiple of my salary and decides whether or not to lend.

    If I am self-employed there can be all sorts of costs in running my business that become my responsibility and that I can set-off against my tax. The cleverer my accountant is and the closer the two of us are prepared to sail to the wind the more beneficial this becomes. The dilemma for the mortgage company is that this arrangement is opaque. How on earth can they work out what is really going on? The closest figure they can come up with is the SA302 figure.

    An employed person can't go to their lender and say, it costs my employer 3k a year to run my car, can I get another 4 times 3k on my loan please?

    Equally I don't see why a self-employed person should expect to go to the lender and say, I've declared 3k in costs for my car, but I think you should take that 3k into account when calculating how much you are prepared to lend, as it forms part of my income.

    Lending to self-employed people is seen as more of a risk. One way of minimising that is taking a conservative view on what income you base the lending on.

    Its not just you, or self-employed people either. The world is a very changed place, post 2008ish. This forum has plenty of employed people who are struggling to persuade lenders of their ability to pay back a loan. Many of these would have gone through very readily 7-8 years ago.
    • kingstreet
    • By kingstreet 8th Feb 14, 8:42 AM
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    kingstreet
    Lenders use net profit to calculate borrowing power for the self-employed as this is the closest thing to an employee's gross income.

    You do everything you can to reduce your net profit so you pay less tax.

    As a result you get to borrow less.

    Unfortunately, that's how it works. We understand what you are saying and what you are trying to do, but a lender will only see what you are declaring to HMRC.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
    • Kynthia
    • By Kynthia 8th Feb 14, 9:15 AM
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    Kynthia
    Many if us on this site do understand the difference between taxable expenses/profit and cash expenses/profit. However that doesn't change the lending criteria of the mortgage companies so there's no point getting so annoyed with everyone.
    Don't listen to me, I'm no expert!
  • BlueberryB
    We are in the same boat so to speak, but there is only my husband working, I have put into calculators our income from last year up til now and see we can borrow up to 306k!! BUT if I put in the figures our accountant has given us that will be on the SA302 from this year (so far) then the banks calculators are only willing to give us 147k!
    That is with putting the income in but divided by 2 as I am a 50% share holder in the company (limited) as everything including dividends are split equally as to avoid paying into the higher tax bracket. luckily enough though we only want to take a mortgage for 127,500.
    I know it's the way it's done etc and there is nothing we can do about it, so just have to suck it up! Like you our bank statements confirm we live a comfortable and lavish lifestyle but on paper.....not so much!

    If you find a way round it or any lenders that are more sympathetic to self-employed please give me a shout, I have left our stuff with our broker (3rd one lucky?!) to hopefully find a solution for us! It's a new build we are after with the help of the Scottish governments "help to buy -equity loan" builds won't be ready till end of the year, so plenty time to save up some more, but I'm terrified to reserve a plot and pay the reservation fee to find at the end of the year when we make our mortgage application there is no way in hell we would get it I have a default on my file due to drop off next may so hoping this doesn't make a complicated situation even more so.

    We just want a home to call our own that we can grow old in with our 3 children.

    Best of luck bobwilson!
    • Cazza
    • By Cazza 8th Feb 14, 11:02 AM
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    Cazza
    OP, I am both CeMAP qualified and a chartered accountant.

    By and large if you read a lender's lending policy guidance notes the detail will state that their calculations will be based on UK taxable income. If you are self-employed an SA302 is the method by which your taxable income is calculated. If you are employed the method will be payslips / P60.

    The bank will not use the figures on your bank statement as this represents gross revenue to your business, not your personal taxable income. The lender is not deducting depreciation, this is an accounting adjustment. Your accountant is claiming write down allowance, you could choose not to claim write down allowance, as you could choose not to deduct other business expenses. This would lead to a much higher level of taxable income and a higher tax bill.

    By being self employed you will incur expenses that employed people do not; the lender wants to take this into account and this is the method they have chosen. By claiming expenses and allowances to (absolutely legally and correctly) reduce your tax bill but wanting to use a different set of figures to calculate your borrowing ability you are trying to have your cake and eat it, and I mean that in the nicest way.

    I appreciate why you feel this is unfair, I've not worked in the mortgage industry since 2008 but in the 10 years I'd spent in the industry previous to that your experience is something I saw many, many times. My husband is self employed and this is something we have to deal with every time we move or remortgage. You have to make a decision as to whether you want the low tax bill or the big mortgage and pre-plan in the years beforehand.
    Last edited by Cazza; 08-02-2014 at 11:05 AM.
    • kingstreet
    • By kingstreet 8th Feb 14, 11:22 AM
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    kingstreet
    It's a new build we are after with the help of the Scottish governments "help to buy -equity loan" builds won't be ready till end of the year, so plenty time to save up some more, but I'm terrified to reserve a plot and pay the reservation fee to find at the end of the year when we make our mortgage application there is no way in hell we would get it
    Originally posted by BlueberryB
    You'll be applying for your mortgage when you reserve and that will be as soon as the plots are released, with exchange of contracts (or the equivalent up there) about 28 days later.

    The builder will not fit the property out to your spec until you have made a commitment to buy and that means you'll have to have the mortgage in place prior to the commitment.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
    • leveller2911
    • By leveller2911 8th Feb 14, 12:22 PM
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    leveller2911
    It's pretty simple really.



    Lending to self-employed people is seen as more of a risk. One way of minimising that is taking a conservative view on what income you base the lending on.
    I agree that the self employed are seen as a higher risk ,however you will find that the vast majority of self employed people go out and find their own work, they are driven and will go that extra mile to make a living and make the business viable.

    If someone has been self employed and run their own business for say 10 years they should be seen as a far better bet than anyone who is employed even in the Public sector which use to be seen as a "Job for life"..

    Its not just you, or self-employed people either. The world is a very changed place, post 2008ish. This forum has plenty of employed people who are struggling to persuade lenders of their ability to pay back a loan. Many of these would have gone through very readily 7-8 years ago.
    Originally posted by Nebulous2
    Agreed but the days of easy credit are creeping back.Look no further than credit card limits as they are on the rise so how long before the new rules that were put in place for mortgage lending are slowly eroded away. Its only a matter of time before we are back to square 1.

    Remember the number 1 priority of any Government is re-election and if that means making people feel wealthier because their properties value has increased then they will relax borrowing rules (long term)... Look no further than the HTB schemes and we even have Councils like Hastings lending money to young people to buy houses.
  • BlueberryB
    You'll be applying for your mortgage when you reserve and that will be as soon as the plots are released, with exchange of contracts (or the equivalent up there) about 28 days later.

    The builder will not fit the property out to your spec until you have made a commitment to buy and that means you'll have to have the mortgage in place prior to the commitment.
    Originally posted by kingstreet
    Oh right, this is not what the developer and broker said to us? They said you pay a 500 plot fee when you reserve and must have a AIP before you can do this. Also when they start the build you pay 2000 which both these costs come off the price of the house. The plots are released just now by the way, builder is only building on the plots as they are bought! There are a few houses up and people in them already for a few months.


    Maybe it makes a difference that the development we like is out of town in a small rural village, well I wouldn't even call it a village lol it's not got a shop or school, just a small gathering of houses in the countryside (about 25 at the mo) then a development of 19 going up just now with a play park too. The builder did say there really is no rush he said there are 10 of the 19 plots left, they are not selling like hot cakes as the ones in the town do, so I think we are fine to wait a few months.

    Broker said in her email that she would wait till April when the figures for this year are in before applying, which is perfect but from what I read on here AIPs are only usually valid for 90 days! And then it's not even guaranteed you will get accepted when you go full application!! This is what is terrifying me as knowing our luck and nothing ever good happens to us, this is what will happen, and our dream will be shattered to pieces!
    • kingstreet
    • By kingstreet 8th Feb 14, 2:09 PM
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    kingstreet
    TBH it may be different in Scotland, but the same principle applies, the builder will want to get a commitment from you as early as possible.

    Our approach to timing an application on HTB - Equity Loan sounds the same. We are just submitting the Property Information Form now on cases expected to complete in September and we won't do the mortgage application for another couple of weeks to ensure the six months on the mortgage offer doesn't expire before the house is finished.

    We'd expect the mortgage offer on these cases to be issued in late March/early April and for the contracts to be exchanged soon after. This is the point the English buyer is committed to purchase and the builder knows he can fit out the property to the buyer's spec.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
  • BlueberryB
    TBH it may be different in Scotland, but the same principle applies, the builder will want to get a commitment from you as early as possible.

    Our approach to timing an application on HTB - Equity Loan sounds the same. We are just submitting the Property Information Form now on cases expected to complete in September and we won't do the mortgage application for another couple of weeks to ensure the six months on the mortgage offer doesn't expire before the house is finished.

    We'd expect the mortgage offer on these cases to be issued in late March/early April and for the contracts to be exchanged soon after. This is the point the English buyer is committed to purchase and the builder knows he can fit out the property to the buyer's spec.
    Originally posted by kingstreet

    Thanks for your help Kingstreet! You are helping me loads!
    So when you do the AIP you have 90 days to submit a full app? Then after you do that and it's accepted you get the offer, is that when the builder would start and funds are released? Or only when the build is complete the funds are out? What happens if they decide not to give you it any more? Is the mortgage offer in writing mean you have got it or not?
    I'm worrying myself sick about this and I'm terrified we get our (mostly my) hopes built up so much and we fall at the first hurdle!!

    Hubby's credit score is good and he only has HP on a car @ 240 pm it's my credit that bothers me! I have a few late (orange 1) on my noodle account and a default for 1270 to Lowell that is due off next May. I have no outstanding debt and I took my overdraft down last month from 800 to 150 so I still had something but got rid of most. On my Experian I have a good rating with no debt and all green but I noticed there is no record of debts I had out including defaulted account in my maiden name! On both noodle and Experian I have been green for at least 2 years.

    Do you think the above would cause a big problem? This is what terrifies me!
    • kingstreet
    • By kingstreet 8th Feb 14, 2:38 PM
    • 33,532 Posts
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    kingstreet
    This is the way we do Equity Loan cases in England;-

    Check HCA Affordability Calculator
    Obtain agreement in principle
    Preliminary reservation done with builder and solicitor selected
    Property information form and reservation submitted
    HTB - EL Authority To Proceed issued (ATP)

    All the above is done in the first week.

    Formal reservation completed and fee paid
    Full mortgage application submitted
    Lender valuation done and supporting docs submitted
    Mortgage Offer issued
    Solicitor submits Authority to Exchange (ATE)
    Deposit paid to solicitor
    Contracts exchanged with completion "on notice" when build over

    All of the above is done within 28 days of ATP issue.

    Property finished and kitted out to buyer's spec
    Demonstration visit and snagging inspection
    Notice given
    Solicitor submits Forms 1 & 2 for Equity Loan release
    Completion takes place, keys and money change hands and mortgage payments commence.

    All of the above several months later and an be upto nine months from ATP, upto six months from ATE.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
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