We are often asked what is entailed in a mortgage reference, so here is a helpful guide to deal with those questions.
If you are self-employed or director/shareholder of your own company, the financial institution lending you the money is likely to require a reference to confirm the figures that you have given on your application. As your accountant, we know your business and are in a position of authority to give accurate information, so we are usually the first point of contact for this reference. The mortgage company will want to see 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 that we are asked to confirm are:
- The length of our relationship with you as a client
- Three years’ financial figures, usually to include:
- Length of trading
- Income
- Profit
- Drawings (for an unincorporated business)
- Salaries of business owners (for a company)
- Dividends drawn (for a company)
- Reasons for any fluctuations or deviations in profit
Please note that the specific information requested in each case does vary.
How long will it take to prepare a mortgage reference?
Unfortunately, it is not just a case of filling in the gaps on a previously prepared letter, but we aim to complete the mortgage reference within 48 hours.
My accounts and bookkeeping are not up to date. Is this a problem?
The mortgage company is very likely to require three years of recent accounts. Generally ‘recent’ means accounts with a year end within the last six months. They may also require some management information (draft figures) to date.
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. In the instance you don’t, we will need this to be completed before we can proceed with the reference.
Next year I am going to work really hard so I will earn twice as much. Can you amend the past figures on my reference so I can increase my loan?
For a reference we can only disclose information that we know to be accurate to the best of our knowledge. With historical data, this is straightforward as we have financial statements and this cannot be amended.
What if I am asked to provide forecast figures?
Future income and expenditure is inherently uncertain. Under the regulations of our professional body, the Institute of Chartered Accountants in England and Wales, we are therefore unable to report on future income.
I trade as a limited company. Could this be an issue?
Sometimes this can be an issue, but it shouldn’t be. Due to the mortgage companies’ 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 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 is asking for an SA302 form from HMRC. What is this?
Sometimes the mortgage company will request form SA302 and a Tax Year Overview from HMRC for the relevant tax years to verify the figures that have been provided to them, and to confirm that tax payments are up to date. The SA302 is a summary of your income as reported to HMRC on your self assessment tax return and comes from our software systems. The Tax Year Overview is taken from the HMRC portal and shows the amount of tax to be paid. The two documents together confirm that what was reported on your self assessment tax return matches HMRC’s records.
Will I be charged an extra fee for my reference?
Although references are often straightforward because we can only report facts, from time to time these lead to additional questions from the lender. There can be multiple revisions and time spent on additional explanations to ensure you get the best outcome. For this reason, although the first hour is covered by your monthly service package, we charge on an hourly basis thereafter.
Summary
You are asking the mortgage company to lend you a significant sum of money and it is far from an automatic task to obtain such funds. You will need to provide detailed information and a 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. If you’d like to discuss your circumstances, get in touch.
