Recently self employed, What are my Mortgage chances ?

[muppetboy]

Have recently (4 months) quit the South East and Moved West. Bought a business that runs at a nice profit and has done for years. What would be my chances of getting a Mortgage. Would be 40% Loan to Value at the most? Would they need a couple of years of my own books or are there other ways to do it.

Any help would be cool..

[birdcage]

Presumably you are director of your own firm, given its trading history that makes you essentially 'employed' I would guess?

[muppetboy]

Partner with Wife.

[birdcage]

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

[muppetboy]

Sounds promising. Maybe a chat with a IFA is in order then.

[Road Pest]

I have been out of the mortgage game for a few months but I'd say you'd be very lucky to get anywhere without severe lending criteria, even then I know the broker I worked for wouldn't do a mortgage for you.

[Eric Mc]

birdcage said:

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

Not if it's a partnership rather than a limited company.

He mentions that his wife is a "partner" - so I presume the business is a partnership and NOT a limited company.

[Cogcog]

Eric Mc said:

birdcage said:

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

Not if it's a partnership rather than a limited company.

He mentions that his wife is a "partner" - so I presume the business is a partnership and NOT a limited company.

Does it make that much difference? I would be concerned if lenders didn't have the sense to make a decision based on income , whether that was as structured salary as an 'employed' director or paid as dividends? I recall my mortage lender actually talked through my accounts with my accountant. On paper my wife and I earn only £6,400 PA each in salary but clearly that isn't howwe take our main income from the business.

[Road Pest]

Cogcog said:

Eric Mc said:

birdcage said:

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

Not if it's a partnership rather than a limited company.

He mentions that his wife is a "partner" - so I presume the business is a partnership and NOT a limited company.

Does it make that much difference? I would be concerned if lenders didn't have the sense to make a decision based on income , whether that was as structured salary as an 'employed' director or paid as dividends? I recall my mortage lender actually talked through my accounts with my accountant. On paper my wife and I earn only £6,400 PA each in salary but clearly that isn't howwe take our main income from the business.

Because of the current climate there are considerable restrictions on lending criteria compared to a couple of years ago. The recent mortgage review by Lord Turner and the build up to it has made lenders make decisions to tighten criteria before it is imposed on them. I'd be interested to hear if the OP gets an offer.

[Eric Mc]

Cogcog said:

Eric Mc said:

birdcage said:

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

Not if it's a partnership rather than a limited company.

He mentions that his wife is a "partner" - so I presume the business is a partnership and NOT a limited company.

Does it make that much difference? I would be concerned if lenders didn't have the sense to make a decision based on income , whether that was as structured salary as an 'employed' director or paid as dividends? I recall my mortage lender actually talked through my accounts with my accountant. On paper my wife and I earn only £6,400 PA each in salary but clearly that isn't howwe take our main income from the business.

In the case of limited company businesses that is true. The personal income of the individual is what they pull from the company in the form of dividend or salary. The business profits are legally separate to the individuals who own or work in the company.

The situation is different for sole traders and partners in partnerships.
For people in these situations, there is normally no "salary" as such shown in the formal accounts - only drawings. Drawings are below the profit lione figures and are not used as the basis of the individuals income tax liability calculations.

Also - personal income from a sole trader or partnership business may not directly relate to the profitability of the business -

Year 1 - business makes a profit of £80,000. Proprietor injects £20,000 capital into the business and draws out £50,000. Remaining reserves £50,000

Year 2 - business makes a profit of £20,000 Proprietor draws out £10,000. Remaining reserves £60,000

Year 3 - business makes a loss of £20,000. Propietor draws £60,000. Remaining reserves - a negative £20,000

What figures should a potential lender be looking at?

In reality, the only figure worth looking at for sole traders and partnerships is the business profit as what the individual decides to draw out may vary from year to year - and may even be not very well linked to the business' capability to support that level of drawings. Believe me, I've seen the latter situation on many occasions.

[anonymous-user]

Cogcog said:

Eric Mc said:

birdcage said:

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

Not if it's a partnership rather than a limited company.

He mentions that his wife is a "partner" - so I presume the business is a partnership and NOT a limited company.

Does it make that much difference? I would be concerned if lenders didn't have the sense to make a decision based on income , whether that was as structured salary as an 'employed' director or paid as dividends? I recall my mortage lender actually talked through my accounts with my accountant. On paper my wife and I earn only £6,400 PA each in salary but clearly that isn't howwe take our main income from the business.

The issue there is the majority of lenders work on a production line basis, it's not worth their time ( and the generally don't have the experienced staff) to be able to assess applications in this way.

Thankfully there are still banks that allow their bankers to make decisions on their own without a computer. Although we tend to be at the top end of the Market.

I would recommend speaking with your business bank, did they bank the business before? If you borrow from them, your manager may be able to submit a report to give more details of your situation to the underwriters.

[DS3R]

birdcage said:

Sure, but if you pay yourself a documented salary and structure it so that the business 'employs' you, given the trading history I would say you will be fine and any decision would be based on salary, not dividend

Totally wrong I'm afraid,

as that would open the door to every 2-bit charlie to spend £30 on an off-the-shelf company from the back of Exchange & Mart and call themselves employed, circumventing all the rules and checks.

You have to declare any (significant) ownership of a company who employs you (a share save scheme in a FTSE100 is [/i]not[/i] significant), don't & you're (potentially) committing mortgage fraud. They're quite hot on that at the moment...

[hamski]

You are treated as self-employed by lenders for mortgage purposes if you own over a certain percentage of the business (normally 25%).

But there are lenders who will take the business income prior to your ownership into account, so it's not all doom and gloom

[aka_kerrly]

Unfortunately the vast majority of mainstream lenders will ask for at least 2 years accounts or in some rare cases 1 years accounts and a accountants projection.

For self employed people a lender considers the gross+net profit and the total of any dividend+salary payments taken from the firm.

dave

[hamski]

The difference with this is that the OP has bought an existing business with existing revenue - which is totally different to a new start-up

[aka_kerrly]

hamski said:

The difference with this is that the OP has bought an existing business with existing revenue - which is totally different to a new start-up

That is a valid point, it is still the case that underwriters are being cautious so will want projections+accounts, the view could be that there is no guarantee the company will continue being profitable with a new owner.