Agreement in Principle Self-Employed

Can you get an Agreement in Principle (AIP) if you’re self-employed? Is it harder to do this?

You can. The process isn’t really any different from being employed. You’d just have to give different documents showing your income, whereas the employed will just use their payslips.

How is self-employed variable income assessed for an Agreement in Principle? Can I use more than one source of income when I apply for an AIP?

For self-employed people, it can be quite normal to have different income streams. If you’re a sole trader, the lenders will look at your SA302, which is your self-assessment for the last year or two, and take your self-employed income from that. Within that, they wouldn’t see any different income streams – it’s just a total.

If you are a limited company director, that income would just be driven from your business. If you did anything else on the side, your self-assessment would incorporate that to use towards your affordability.

So you can use more than one source of income, it just needs to be proven by the documents and your bank statements showing the income coming in.

How is affordability calculated for an Agreement in Principle for self-employed borrowers?

The forms you go through are the same as if you’re employed. It’s not a completely different system. But essentially the lenders will assess your income in different ways.

If you’re a sole trader, they’ll look at your SA302s. If you’re a limited company director, they’ll use your salary and your dividends, or your salary and your share of the company’s net profits.

Then, the lenders will multiply this income by 4.49. Some lenders will multiply by five or 5.5 – it depends on different schemes and deposit size. That will give you your borrowing amount.
The total can be impacted by your other commitments. If you’ve got any dependents or finance, credit cards or loans, that will reduce the affordability to some extent.

For the self-employed, the majority of lenders will take an average of the last two years’ figures as your income. Things are evolving, though, and quite a few lenders now work off the latest year’s figures or even just one year of accounts, if you’ve only been trading for a year.

What information do self-employed borrowers need to provide when applying for an Agreement in Principle?

If you’re a sole trader or a limited company director, they’re going to ask to see your last couple of years’ tax returns or the latest year’s, if that’s all you’ve got. That’s the SA302, your tax year overview – it shows what tax is due and how much has been paid or is due to be paid.

If you’re a limited company director, lenders will also want your company accounts, showing your net profits. Your bank statements are important as well, because lenders cross-reference that the income matches up to what you’ve declared tax-wise.

How reliable is an Agreement in Principle? How long is an Agreement in Principle valid if I’m self-employed and my income changes?

An Agreement in Principle is as reliable as the information you put into it. Personally, whenever I do an Agreement in Principle for a client, I get all of the documents upfront – all those that lenders assess for a full mortgage application. Then it’s based on real-life figures, which gives us the best chance of accuracy.

In terms of how long it lasts, with some lenders it will be 30 days and others 90 days. If you’ve got variable income or income that changes during that process, the amount you can borrow is valid at the point of mortgage application.

The Agreement in Principle is based on what you tell us now, and confirms what the lender could offer you. But if the income changes between the Agreement in Principle and a formal mortgage application, the amount you can borrow may change too.

But with self-employed people, because the documents are based over a 12 or a 24 month period, it’s not often that the income changes. It may not be something you really need to worry about.

Will I need a credit check? Does a Decision in Principle or Agreement in Principle affect credit score?

The majority of them now are all soft credit searches, so they don’t actually have an impact on credit score.

If the question was whether you need to have your credit report before you start looking, I would always say yes. You need to know what your credit score is, and if anything needs work.

The Agreement in Principle check is a soft credit search, so you could do five of them and it wouldn’t impact your credit rating at all.

How do I apply for an Agreement in Principle if I’m self-employed? How long does that process take?

There are a few avenues to get an Agreement in Principle. You can go to a lender and get an Agreement in Principle online. It’s very easy. The banks always advertise that you can do that – but you do run the risk of inputting the information incorrectly. Also, that bank may not be the one that best suits your situation.

You can also talk directly to the bank for an Agreement in Principle. But it’s the same scenario – it’s limited to their own criteria and how they would assess you.

Lastly, you can go to a broker. A broker will assess your personal situation against the whole of the market, looking at all the banks to see which fits your situation best.

If I were doing someone’s Agreement in Principle it could take 30 minutes to an hour. It doesn’t take long.

You’ve demonstrated how a mortgage broker can help. Is there anything else we need to know here? Any final thoughts?

Although the process you’ll go through is the same as for someone who’s employed, it’s more of a minefield – because lenders will assess your income in different ways. Some do things differently to others.

Reviewing your options across the whole of the market with a broker can be worth its weight in gold. If you’re pigeonholing yourself with a particular lender, they may not be giving you the best rate. They may not lend you as much as another lender.

My one big piece of advice for the self-employed is to start speaking to a broker as soon as possible. We’ll assess your current situation and see what you could be looking at.
We can give you a roadmap to get where you want to be if you’re not quite there yet.

Or, perhaps there’s no need to wait and you’re ready to go – we’ll help you find the right mortgage to suit you.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.