Getting a mortgage can be one of the most exciting times in your life, but also potentially stressful if you are going into it without knowing what to expect and what the mortgage lender expects of you. The most common conundrum that mortgage customers have is “What documents do I need when applying for a mortgage?”. With all of our clients, we want to make sure that you aren’t left in the dark about anything so we have compiled a blog explaining exactly what you need when applying for a mortgage.
Core Documents Every Mortgage Borrower Needs In Their Arsenal
Different mortgage lenders will need different things from different clients. But we’ll get into these and their intricacies later. This section will focus on the main core documents that all mortgage customers will need and why the lender asks for them.
Proof of ID
This should be pretty self explanatory but some people don’t always understand the importance of proving your identity. Mortgage lenders are giving the general public hundreds of millions of pounds a day. Can you imagine if you gave every penny in your bank account to a random person on the street and took their word for it that they would pay you back over 25 years? You would understandably be wary of this random person and more than likely want some more information about who they are so that you can keep track of them with your money.
The mortgage lenders feel exactly the same way. They want to see documents from a borrower to make sure that they aren’t just going to take the money and run or refuse to pay the loan back. All mortgage lenders will want to see proof of ID so that they can record your details and make sure that you aren’t pulling the wool over anyone’s eyes. They want to make sure that you are who you say you are, you are old enough to get a mortgage, and that you are legally allowed to live and work in the UK in most cases so that you aren’t deported out of the country with their money.
Normally for a British citizen, a mortgage lender will need to see either a valid and unexpired British passport or a UK driving licence. That’s generally all the proof of ID that they will require for a British citizen. If you are not a British citizen, they often require a few more things. The main thing that they will need to see is that you have permanent right to reside in the UK. This means that you can’t be on a temporary visa, or a tourist visa or anything like that. You will need to have legal rights to reside indefinitely in the UK.
Ways Of Proving Permanent Right To Reside For Non UK Nationals
- Permanent right to reside can normally be evidenced to the lender through one of the following ways;
- Immigration status ‘share code’ – Non UK nationals can view their immigration status online at gov.uk who can provide a share code which lasts for 30 days. Once you have this code, your mortgage advisor will share it with the lender and they can check your residency status.
- Indefinite leave stamp in passport including: Indefinite Right (or Leave) to Remain/Enter; Right of Abode.
- Biometric Residence Permit showing ‘indefinite’ rights to remain (this includes ‘indefinite leave to remain’, ‘indefinite leave to enter’ or ‘no time limit’)
- Letter from the Home Office confirming indefinite right to remain in the UK
If you do not have any of these documents it is more than likely that you will not be accepted for a mortgage with a high street mortgage lender however there are potentially options with international branches of banks. It’s always worth speaking to your mortgage advisor to see if there is a route forward.
Three Months Bank Statements (Minimum)
Another thing that all mortgage lenders will want to see is a minimum of three months most recent bank statements. They ask for these for several reasons. The first is for proof of ID again. Simply, they will check the name on your bank account and make sure that it matches to your proof of ID do that they can eliminate any chance of you providing bank statements that don’t belong to you.
The second reason is to check and prove your address is correct. In your full mortgage application, the mortgage lender will want to know three years address history so that they can check how long you have lived in the UK for and also check your credit history. By looking at your bank statements and the address that they are registered to, the mortgage lender can check that you have provided them with your current and most recent address and that you aren’t living anywhere else that you haven’t told them about.
The third reason is that they want to make sure that there aren’t any unusual, unacceptable, or fraudulent deductions coming out of your account that could threaten the security of the money they are lending you. That might sound like a loaded sentence but basically, the lender wants to make sure there isn’t anything dodgy going on that you haven’t disclosed to them already.
This could be things like hidden debt collection payments, loans, credit cards, personal finances that you haven’t disclosed or in the worst case scenario a gambling habit that could hinder your ability to pay back the loan once it has been granted. The underwriters who work for the lender will check through you statements and make a note of anything they think may be suspicious. They will always let your mortgage advisor know their concerns and 99% of the time will give you the opportunity to explain them, if you can.
The fourth and most important reason that they ask for bank statements is as a form of proof of income (which we will go into detail about in the next section). The bank statements are used by the mortgage underwriters to check that the income you have said you earn matches up to your proof of income documents and the money going into your bank account. If these don’t match up, the underwriter will raise a query with you and your broker as it could potentially be mortgage fraud. For example, if in your application you declare that you earn £100,000 a year but your bank statements only show £3,000 going into your bank statements a month from your employer, the lender will want to know where the rest of the money is.
Proof Of Income
This is definitely one of the things that gets mortgage customers into a mess if they don’t have the right guidance from a mortgage advisor so we would always recommend speaking to one before you start looking at getting a new mortgage. In this day and age, there are many weird and wonderful professions and the standard way of being employed and getting paid is not so standard anymore. In this section we will try to go through as many different types of income and the income proof documents that the mortgage lender will want to see as we can. If you can’t find your income type here, please give our advisors a call or send our enquiries inbox a quick message and we will be able to give you some guidance.
Standard Monthly/Weekly or Bi-Weekly Employed Payslip
The standard proof of income for anyone who is employed by a business (that they don’t own part or all of) is payslips. If you are employed and receive payslips showing your gross and also net (after tax) pay, the mortgage lender will generally want to see 3 months worth of pay slips to match your bank statements. This goes for if you receive monthly, weekly, by-weekly or daily pay slips. They will then check that your pay slips match how much income you have declared on your application and the income coming into your bank account. If any of these don’t match, they will raise a query with your advisor and they may ask for more pay slips, your contract of employment, or more bank statements.
If you have a full time employed job that you receive payslips for but haven’t been in your job for three months yet, the mortgage lender will either insist that you wait until you have 3 months payslips, ask for your contract of employment to prove your income and job specifications, and/or will want to see at least 12 months employment history in a similar line of work. All of these things will be checked thoroughly by your advisor and their administration team prior to submitting your mortgage application.
Paid In Cash
This can be a tricky one, to be completely transparent. Most mortgage lenders are not a huge fan of people being paid in cash as there isn’t a very clear audit trail for them to follow and make sure the income is all genuine. They also want to make sure that your are paying all the necessary tax and national insurance that you are legally required to from your salary. For lenders that do accept people being paid in cash, they will need to see your pay being deposited into your bank account whenever you get paid (weekly/monthly etc.).
They will also usually want to see some form of pay slip or receipt from your employer which shows how much they have paid you in cash and that the tax has been deducted by them prior to giving it to you. Generally three months worth are required again. If for whatever reason the pay slip and the money you have deposited in to your account does not match or differs greatly, they will have an issue with this.
Self Employed Mortgage Documents
When looking at self employed mortgage customers, it’s important to know what kind of self-employed person you are. In the eyes of the UK government there are generally 2 main types of self employed people. Share holding directors of limited companies and sole traders.
A share holding director of a limited company is a person who is employed by a company but also owns a significant amount of the shares in the company so they essentially employ themselves through the company they own. They usually receive a salary and also a share of the profits of the business called dividends. As they are their own employer, they must pay tax on the income they receive and the income their business makes. This is normally calculated and document by an accountant in something called a limited company accounts.
These account are a document which shows how much income has came into and gone out of the company for the previous 12 months so that you know exactly how much tax needs to be paid to HMRC. This document will show how much salary you have been paid for the year and also how much dividend you have received.
Generally, a mortgage lender will want to see a minimum of 2 years worth of limited company accounts if you are a company director but some lenders may want to see more. They will then calculate an average of the salary and dividends that you have received over the last 2/3 years and this will be used as your income figure when calculating your mortgage. For example, if you received £10,000 salary and £50,000 dividend in 2020 and £13,000 salary and £62,000 dividend in 2021, the lender would calculate your income as £67,500 for your application. If your latest years figures are less than the previous year, the lender will always use the lower figures.
Are There Any Exceptions For Limited Company Directors?
Although generally these are the rules for limited company directors, there are some exceptions. Most lenders will class you as a self employed limited company director if you own 20% or more of the shares in a company. If you own less than 20% shares, you will be classed as employed and often they won’t accept any dividends that you receive. Some lenders however, will treat you as self employed if you own less than 20% but there are not many and are reducing by the day.
Some lenders may accept your latest year income rather than an average. Again, these lenders are very rare however there are potentially a couple of lenders who may use your latest year’s accounts rather than an average.
Some lenders will go off your latest years accounts and projected earnings for the next year calculated by your accountant. Often with these lenders, they will ask for a document called an accountants certificate where your accountant will detail your previous years earnings and their predictions for the upcoming year based on the performance of your business and the income received so far.
Again, all of these are on a case by case basis and some lenders are more lenient than others. Prior to your full application, your mortgage advisor will check all of this thoroughly so that if you need an accountant’s certificate or any other proof of income, you have it in place nice and early.
A sole trader is a self employed individual who does not own a limited company or shares in a limited company. They receive income throughout the year and rather than receiving an official salary and dividend and calculate/pay their tax through limited company accounts, they pay their tax directly with HMRC annually. This is then evidenced by HMRC providing them with two documents per year, a tax overview letter and a tax calculation letter.
- The tax overview letter details how much tax and national insurance you have paid for the year
- The tax calculation details the gross amount of income you have received for the year, the tax that you have paid based on the tax code that HMRC has given you and the net income you are left with for the year after the tax has been deducted.
With sole traders, the mortgage lender will want to see 2 years worth of tax overviews and calculations minimum and with use an average of the last two years net income as your annual income for the mortgage application. For example, if you earned £25,000 in 2020 after tax and £45,000 in 2021 after tax, your annual income will be calculated as £35,000. Again, if your latest years net profit is less than the previous year, they will always use the lower figure. There are no exceptions.
Self Employed People Outside Of The Norm
A sometimes unclear territory when self employed people are applying for a mortgage is when their income doesn’t seem to fall into either category clearly. We will go through a couple of these now.
Day rate contractors/temporary contractors
Sometimes, skilled professionals are contracted rather than permanently employed. Meaning that rather than having a contract that guarantees permanent employment with no end date, some people are contracted to 3, 6, 12 months with an end date or an unspecified end date. Often these type of employees are paid a day rate or a weekly rate or a retainer rather than a monthly or annual salary. This is common with IT professionals who are employed for setting up IT infrastructure in a business but may only be needed for a few months so they are paid a day rate for every day they work. When this contract ends, they move onto another contract with another business.
So is this employed or self employed? It really depends on who pays the tax. If the person paying you deducts tax and national insurance at source before paying you, then you are classed as an employed day rate/week rate contractor. In this case, the mortgage lender will usually want to see your contract and if you have not been on the contract for that long, they may need to see proof of previous work. If you receive the pay from the company you are contracted to but you have to pay your own tax, then you are a sole trader contractor and will be treaded as a self employed individual. If you receive you have set up a limited company and you are paid through this limited company as a contractor, you will be treated as a self employed company director.
CIS Contractor (Construction Industry Scheme)
This is a very common form of income and people often get confused about whether or not they are self employed. Essentially, this is a form of employment for people who specifically work in manual construction jobs such as bricklayers, roadworkers, roofers. In a similar way to a contractor, you are hired by a construction company for your skills in your profession on an often temporary contract under a construction industry scheme. Rather than receiving pay slips, you will normally receive something called a CIS voucher which essentially shows the type of contract that you are on an the income that you receive either daily, weekly, or monthly.
A lot of people who are CIS contractors move around jobs and companies frequently and so consider themselves self employed however, when it comes to getting a mortgage, the lender will only consider you self employed if you pay your own tax and national insurance. If the person paying you deducts the tax at source before you get your CIS voucher, then you will be classed as an employed contractor. If you pay your own tax, the lender will need to see your tax documents.
If you don’t pay your own tax, they will want to see a minimum of three months CIS vouchers but may need to see more if you are paid daily or weekly. Always make your mortgage advisor aware of this before applying for a mortgage because if you apply for a mortgage as an employed contractor but it turns out that you are classed as self employed, it could negatively affect the amount of mortgage you are eligible for.
Partner In A Firm
Sometimes, an employed individual who has performed well in their role will be appointed a partner in the firm. This, as well as boosting your position in the business, often comes with a salary increase and a share of the profits from the business. Often, the partner will not own any shares in the company (although they can be awarded shares) so in normal circumstances, they would not be treated as self employed. However, with partnerships a lot of lenders will treat them as self employed if they want to use the share of the profit as income. Lets take Halifax’s criteria (correct as of Sept 2022) around partnership income as an example:
Self employed / Share holding of a Non Ltd Company (ie Partnership) Taxable Income
- Treated as self employed
- Require last 2 years Tax Calculations and corresponding Tax Year Overviews or Last 2 years finalised accounts Where the customer has been trading for less than 2 years, a minimum of 1 year’s accounts will be considered. Latest 3 months’ bank statements for the account which is used for business purposes may be required.
Partner of LLP receiving profit share as part of their salary package Irrespective of share of equity
- Treated as self employed
- Last 2 years Tax Calculations and corresponding Tax Year Overviews or Last 2 years finalised accounts Where the customer has been trading for less than 2 years, a minimum of 1 year’s accounts will be considered. Latest 3 months’ bank statements for the account which is used for business purposes may be required.
Employee of LLP – not equity shareholding partner
- Treated as employed
- Require details of basic annual income and latest payslip (this applies whether the applicant is paid weekly or monthly)
If you are a partner in a firm but unsure if you are employed or self employed in the eyes of a mortgage lender, always discuss it with your mortgage advisor first. These are the main types of self employment and most self employed people will fall into one of these categories. If you still feel like you are in the dark about your self employment status, give us a call. Now lets look at a couple more income types and the proof the lenders will need.
Benefit Income
Benefit income is an essential source of income for thousands of people in the UK and can help out people who need that extra income that they can’t currently get through employment. Most mortgage lenders will accept benefit income in their affordability however there are some rules. The most important and major rule is that mortgage lenders will not accept an application based on purely benefit income alone unfortunately.
The reasoning being that although a lot of benefits will be received long term, they can fluctuate or be stopped and are not deemed as concrete as employed or self-employed income. So, this means that you will need to have some form of employed or self employed income in place that is supplemented by the benefit income.
The next thing that needs to be considered is the type of benefit income that you receive. Most lenders will accept child benefit, child tax credits, carers allowance, Disability living allowance. There are other benefit forms that lenders accept but these are on a lender to lender basis and you will need to discuss these with your mortgage advisor. As proof of these incomes, the mortgage lender will generally need to see a benefit award letter which details how much you are entitled to per year. They will also more than likely need to see the income going into your bank account however this will be covered when you provide them with your three months statements as usual.
Pension Income
Yes! You can use pension income to get a mortgage! If you are currently receiving a pension either as your main income source or a supplement to an employed/self employed position, most mortgage lenders will accept this income although your mortgage term may be affected if you are already past the state retirement age (currently 66 but will rise).
In terms of documents required as proof of income, mortgage lenders will need to see pension statements showing either the amount of pension you receive per year/per month or the balance of your pension pot. They will also check your bank statements to make sure that the pension being paid into your account is genuine and the same amount as your statements show.
That wraps up the majority of income types but as always, if you have a type of income that doesn’t appear in this blog, give our advisors a call today and we will be very happy to offer some guidance and answer any questions you have. Lets move on to some more mortgage documents.
Proof Of Deposit
An integral part of the house purchase process is providing a deposit. A deposit is a down payment provided by the buyer of a property that comes from their own sources. As most mortgage lenders will only lend up to between 85% and 90% of the value of the property, buyers need to provide their own deposit to bridge the gap between the mortgage and the full value of the property. If affordability allows it, you can get a large mortgage and only have to put down a small deposit but in a lot of cases, people will need to contribute a larger deposit to afford the property they want.
Every mortgage lender will need to see proof of deposit, no matter where it comes from. The two most common ways that people get a deposit are from their own savings or as a gift.
if your deposit is coming from savings, your mortgage lender will need to see three months bank/savings account statements that show the full balance of the deposit and a build up of funds to prove where it came from (e.g. regular salary). If you have moved your deposit monies around to different accounts, the lender will want to see a 3 month trail so they will more than likely ask for statements for all accounts involved. If you can’t evidence your savings, your application will be rejected.
If your deposit is coming from savings in the form of a savings bond or something similar where the cash is not in your account right away, the lender will need to see a recent savings bond statement to evidence how much is available.
With most lenders, your deposit can come in the form of a gift from family. Major emphasis on the word FAMILY. That means that your friend down the pub can’t give you the money for a house deposit. You must have been provided the deposit as a non-refundable gift by a close family member such as a parent, grandparent, sibling. Some lenders may extend to aunts, uncles and cousins. For proof of this, lenders will generally need to see three months savings statements from the gifter, the same way they check your own savings statements. They might also ask for a gifted deposit letter which is just a letter written and signed by the gifter confirming that the money is a non-refundable gift.
Equity From Sale Of A Property As A Deposit
For any mortgage where the deposit is coming from the equity from the sale of another property, whether your own or the gifter’s property, the lender will need to see a sales memorandum and potentially a mortgage statement if the property is mortgages. This is to confirm that the property has sold and the deposit will be available imminently and that once you have paid back any outstanding mortgages and fees, you will have enough equity to cover the required deposit. If you can’t provided any of this, your application will not be accepted.
When Do I Need To Get These Documents Together
We would always recommend that if you are starting to look at getting a new mortgage, you start to get the core documents together as a priority. Your ID, Bank statements, and proof of income. When you have your initial mortgage conversation with your mortgage advisor, they will ask you about your income, outgoings, residency status so its always helpful to have these documents to hand at this stage. Once you have gone through your options with your advisor and are ready to proceed, they will send you an email requesting your mortgage documents so if you have these ready already, you can get them over to the advisor and speed things along nicely.
Now that the advisor has your documents on file, they will be there ready and waiting to be uploaded to the lender’s online application portal when everything is confirmed and you are ready to have your application submitted. Along the way, your advisor and their administrator will monitor your application and if the lender requests any further documents such as more bank statements or an employment contract, your advisor will let you know immediately. The quicker you can get these documents sent across, the quicker we can rectify any queries or concerns that the lender has.
By reading this blog and getting an idea of the types of documents that you might need when applying for a mortgage, you have prepared yourself well and your mortgage application will go through a lot smoother, no matter what document the lender may request. If you or anyone you know is concerned about anything to do with their income, their bank statements, their deposit, or just simply wants to know where to start when applying for a new mortgage, please feel free to give our team a call today to speak to a professional.
We hope that you found this blog useful and we look forward to helping you with your mortgage application in the future!
