Agreement in Principle Self-Employed
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Agreement in Principle Self-Employed
Can you get an Agreement in Principle if you’re self-employed?
Yes, you can get an Agreement in Principle or a Decision in Principle, as it’s sometimes called, as a self-employed applicant. The process tends to be a bit more complex than for salaried employees.
We need to see more evidence of your income and financial stability, because you don’t have a fixed monthly wage – so it is a little bit more complicated that way.
Is it harder to get an Agreement in Principle if I’m self-employed?
It can be, but it’s not impossible at all. It mostly comes down to how lenders assess your income. They will need proof of a stable income, going back typically over two years of self-employed accounts – as opposed to three months’ payslips. If you’re able to evidence that, a mortgage should be no problem.
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 Agreement in Principle?
Yes, you can use multiple sources of income for a Decision in Principle as a self-employed borrower. Lenders each have their own method of assessing variable income.
They may average it over two or three years, to smooth out the highs and lows. You can also include additional income alongside your self-employed earnings, such as rental income from Buy to Let properties, or dividends or shares from other businesses.
You might also have overtime, bonuses or part-time income if you’ve got an employed role as well as your main self-employed role. Some people also use benefits like child maintenance or even pension income.
How is affordability calculated on an Agreement in Principle for self-employed borrowers?
It’s calculated a bit differently from employed borrowers, because of the income potentially fluctuating from one year to the next. It usually involves averaging your profits over two or three years.
Some lenders place more emphasis on your most recent year, especially if your income is trending upwards. They can also accept multiple income sources. But if your most recent year is lower than the year before, lenders either take an average or just the lower amount.
What information do self-employed borrowers need to provide when applying for an Agreement in Principle?
Two or three years of income evidence will be needed. That will be the SA302 tax calculations from your HMRC government gateway – or your accountant will be able to provide them. Those basically show the amount of profit you’ve made.
Your tax year overview is the receipt from the tax being paid to HMRC, and that’s also required. Your accountant can also prepare business accounts, and profit & loss or balance sheets are sometimes asked for.
We may need business bank statements to support the figures, and possibly a reference or a statement from your accountant to verify their projections for the following year. That tends to apply for a fairly young business. Usually the income would need to be high and consistent for a lender to accept that.
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How reliable is an Agreement in Principle (AIP)? How long is an AIP valid if I’m self-employed and my income changes?
An Agreement in Principle is a useful indicator, but not necessarily a guarantee of what you can borrow. Its reliability depends on how it was obtained and the lender’s process. It shows the amount the lender might lend you, but it’s not a full mortgage offer. It doesn’t guarantee that you’ll get approved when you formally apply.
An AIP is usually valid for 30 to 90 days, which is the same for employed and self-employed borrowers. Variable income can affect how lenders view its reliability. Lenders might reassess your Agreement in Principle if your income were to change for any reason, and they might ask for new documentation to verify it.
Will I need a credit check? Does a Decision in Principle affect credit score?
It would be a good idea to get your credit report before starting that process, particularly if you’ve had issues in the past with credit.
The AIP is effectively a credit check, anyway. However, it won’t give you a score. It’ll just say whether you’ve passed or failed. Sometimes it will be a conditional pass, or it will offer an alternative lending amount.
Lenders have their own internal scoring systems, too. Customers come to us assuming that their Experian credit score is what’s used, but in fact lenders use internal systems. They don’t disclose the details of those. Sometimes your credit score looks okay, but for the Agreement in Principle a lender might discover something on their internal system that they don’t like.
But a failed Agreement in Principle doesn’t usually affect your credit score. Most lenders use soft searches these days. Some do use a harder search, but your adviser can select the right lenders to avoid a mark being left on your credit file.
How do I apply for an Agreement in Principle if I’m self-employed? How long does this take?
For the self-employed it can be a bit more detailed than for employed applicants. Just make sure you’ve got your documentation ready – your tax calculations, SA302s, your tax year overviews, your proof of deposit, your most recent bank statements, ID, and details of your existing credit agreements.
If you have loans and credit cards with balances on them, make sure you have information about how much is owed and what the monthly payments are. It doesn’t hurt to get hold of your credit report prior to starting out, even if you feel it would be perfectly fine. There still might be something there – perhaps you’re not on an electoral roll or there’s a missed payment you were unaware of.
You might have a credit card with a small limit on it. Even if it’s only £300, if you’re maxing that out every month that can still have an effect on your credit score. Looking at that report before starting out can be useful.
What else do we need to know about an Agreement in Principle when self-employed?
Speaking to your broker is always the first thing you should do. We know our way around the market and the criteria. We can help you navigate through it all in a much smoother and more efficient way.
Then you will have more time for yourself. You’ll see how time-consuming it can all be and how many questions you’ll have. Having someone as a guide throughout is invaluable.
Key Takeaways:
- It is possible for self-employed individuals to get an Agreement in Principle (AIP) or Decision in Principle (DIP), but the process is typically more complex than for salaried employees.
- Lenders generally require proof of a stable income, usually covering two years of self-employed accounts, which includes SA302 tax calculations and your tax year overview.
- Variable self-employed income is typically assessed by averaging your profits over two or three years to smooth out fluctuations. Lenders can also accept multiple income sources like rental income, dividends, or part-time earnings.
- An AIP is a useful indicator of what a lender might lend, but it is not a full mortgage guarantee. It is usually valid for 30 to 90 days and may be reassessed if your income changes.
- The AIP process involves a credit check, but most lenders use a ‘soft search,’ which generally does not affect your credit score. It is still recommended to review your credit report before applying.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The information contained within this article was correct at the time of publication but is subject to change.
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