We are often asked what is entailed in a mortgage reference, so here is a helpful guide to all of your FAQs.
When self-employed, the financial institution lending you the money are likely to require a reference from your accountant to confirm “the figures”.
As your accountant knows your business and is in a position of authority to give accurate information, they are usually the first point of contact. The mortgage company will like to see a consistent income that is in line with you being easily able to afford to make the repayments.
“What is involved with preparing a mortgage reference?”
The usual things they want us to confirm are:
- 3 years financial figures, usually to include;
- Length of our relationship with you as our client
- Length of trading
- salaries of business owners
- Reasons for any fluctuations or deviations in profit
- Forecasted income and profit (in many cases)
Please note the specific required information does change in each case.
“How long will it take to prepare a mortgage reference?”
That depends. Unfortunately, it is not just the case of re-listing a previously-prepared letter.
Your accountant should aim to complete the mortgage reference within 48 hours (if they do not require forecasted figures). Exact time does vary depending on the exact format and information requested.
“My accounts and bookkeeping are not up-to-date. Is this a problem?”
That depends too – the mortgage company are very likely to require 3 years of recent accounts. By ‘recent’, we’re talking with a year-end within the last 6 months.
In addition to this, they may still require some kind talking with a year-end within the last 6 months. They may also still require some kind of management information (draft figures) to date and/or forecasted figures. In an ideal situation, you would have up-to-date bookkeeping on a good software system, where data is easy to extract should the need arise.
“Next year I am going to work really hard so will earn twice as much. Can you amend the past figures on my reference so I can increase my loan?”
Unfortunately not. With the reference, your accountant can only disclose information that they know to be accurate to the best of their knowledge.
With historical data, this is straightforward as you would have financial statements. When it comes to predicting future earnings these have to be assessed to ensure they are realistic and achievable. Historical data cannot be amended. Forecasting is, of course, more flexible but fluctuations in activity levels must be quantified.
“How long do forecasted figures take to prepare?”
If your Mortgage Company or bank specifically requires forecasted figures, it will take longer to prepare. At a rough estimate, we suggest one week for a forecasted profit and loss, subject to the information being readily available.
“I trade as a limited company. Could this be an issue?”
In short, yes – sometimes, but it shouldn’t be!
Again, due to the mortgage company’s inflexible processing systems, there is a frequent misunderstanding regarding how directors of companies receive their income (usually split between salary and dividends), which can cause an issue when applying for finance.
However, this kind of structure is not unusual for the many thousands of business owners like you, who have a small limited company, and it is simply a lack of understanding. We can work with the bank to make sure there is clarity.
“The mortgage company are asking for a specific SA302 form from HMRC. What is this?”
Occasionally, the mortgage company will request a form from a third party as evidence.
Unfortunately, with the advent of online filing HMRC don’t automatically issue such paper forms so we won’t have copies on file – requesting the forms can take a couple of weeks for HMRC to supply!
The mortgage companies are lending you significant amounts of money and, regrettably, these days it is far from an automatic task to obtain such funds. You’ll need to provide significantly more information and provide a much greater level of security, whether that’s evidence of a combination or all of the following: a consistent annual income, assets to secure against, a large deposit and a reliable guarantor.
For information on our accountancy packages, please call us on 01872 300232 or email us at email@example.com.