Getting a mortgage when you’re self-employed can be a bit tricky — but it’s totally possible. You just need to jump through a few extra hoops to prove you can afford it.
In this short guide, we’ll explain what those hoops are and everything else you need to know.
Can I even get a mortgage if I’m self-employed?
Yes, you can!
The fact that you’re self-employed won’t prevent you from getting a mortgage, although being your own boss can make things a little more complicated. This is because there’s more pressure on proving your income than if you were employed by a company.
Some lenders want to see up to three years of accounts to make sure you can afford the repayments (whilst salaried employees just need to show their last three months of payslips).
But, if you can point to solid earnings and a strong track record in your field, you should have access to the same deals and rates as everyone else.
Is there such a thing as a “self-employed mortgage”?
If you were told about a mortgage specifically for self-employed people, this isn’t entirely true.
When you take out a mortgage as a self-employed person, you’re getting the same mortgage as someone who’s on a company’s payroll. The only difference is that you need to bring more paperwork to the party to prove you can afford it.
This wasn’t always the case, however. There used to be something called a self-certification (or self-cert) mortgage. This meant you could take out a mortgage without having to prove your income by self-certifying that your figures were correct. In other words, you’d sign a declaration saying that you could manage the repayments and that was that.
Unsurprisingly, self-cert mortgages were banned by the Financial Conduct Authority (FCA) because they put people at risk of taking on debt they couldn’t afford to pay back. Nowadays, if you’re self-employed, you need to prove your income in the same style as everyone else.
What counts as self-employed in the eyes of a lender?
You’ll be considered self-employed if you own more than 20% of the business that you earn your main income from. This could be as a sole trader, contractor, or freelancer, as part of a business partnership, or as a director of a limited company.
What do I need to prove my income for a self-employed mortgage?
Getting a mortgage when you're self-employed often comes down to proving beyond a doubt that you can afford the repayments. To do this, you’ll need this stuff:
-Self-assessment (SA302) tax calculations, plus your tax year overview, for each of the last two or three years.
-Two or more years of accounts. (Lenders quite like it when your accounts have been prepared by a qualified chartered accountant because it lets them know they’re accurate. It may cost a bit extra to have this done, but it can be well worth it.)
If you’re a company director, lenders might ask for evidence of dividend payments too. And if you’re a freelancer or contractor, they sometimes ask for proof of upcoming work.
Armed with this information, lenders usually work out your average profit over the past few years to work out whether you’ll be able to make your repayments.
What if I only have one year (or less) of self-employed accounts? Can I still get a mortgage?
Unfortunately, if you only have less than a year of accounts, or you haven’t yet filled out a tax return for your first year of trading, you’re going to find it tough to get a mortgage.
For most lenders, if you’re newly self-employed, there won’t be enough proof that you can afford to repay a mortgage. Without that first year’s tax return and accounts to scrutinise, it’s hard for them to judge your affordability.
If you do have one year of accounts, while it will be harder to get a mortgage, it’s not impossible. There are some lenders who are specialised, or who have more generous eligibility criteria for people who are self-employed.
What else do I need to show lenders?
The extra focus on proving your self-employed income means there’s a little more prep work required — but beyond that, the mortgage application process is pretty much the same as any other.
Like an employed applicant, you’ll need to have:
-Proof of ID (like your passport or driving licence)
-Proof of address (like a council tax bill)
-Utility bills from the past three months
-Up to six months of bank statements
Here’s a list of everything you’ll need in more detail.
And that’s not all... Most lenders will also want to look at how much you spend on bills and living expenses. That’s because they want to be absolutely certain that you can afford to make your mortgage repayments even with your outgoings. You’ll be asked about things like:
-Childcare costs
-Travel costs
-Credit or store card repayments
-Loan repayments
-General living expenses (spending on clothes, groceries, going out, holidays)
Here’s everything you need to know before applying for a mortgage.
How much can I borrow if I’m self-employed?
It depends. When you apply for a mortgage as a self-employed person, the lender will carry out something called an affordability assessment. This helps them figure out if they’re happy to lend you money, the amount they’ll lend and at what interest rate.
That means they’ll look at how much you earn and how regular your income is before accepting or declining your application.
A few things to keep in mind:
-Lenders will typically work out how much you’ve earned on average over the past two or three years. If you made £25,000 in year one, £20,000 in year two, and £30,000 in year three, the lender will assume your average salary is £25,000. If your income has increased year-on-year, they might base their calculations on your most recent tax year, meaning you could borrow more.
-If your earnings have fluctuated wildly over the years, it can spook lenders to the point where they’ll only consider your lowest earning year as the most accurate. This could mean you’ll end up with a lower mortgage offer than you initially hoped for.
Note: Most lenders will consider the reasons for a dip in earnings if you can offer an explanation. For example, maybe you invested in new equipment, which lowered your profits for that year.
Use our
mortgage calculator to get a general idea about how much you could borrow.
Securing a mortgage when you’re self-employed: a few tips for success
Like any other mortgage application, having a good credit score and a healthy deposit will go a long way to improving your chances of getting a mortgage when you’re self-employed. Here’s why:
-Lenders are risk-averse. They don’t want to lend huge sums if they can’t be sure they’ll be repaid on time and in full. A strong credit score helps to show that you’re responsible when it comes to borrowing and repaying money.
Need some help with all things credit?
Here’s how to improve your credit score.
-The bigger your deposit, the less risky you’ll look to a lender. This is thanks to something called your loan-to-value (LTV). Your LTV is the size of your mortgage as a percentage of the total property value.
Note: LTV is the size of your mortgage compared to the property’s value. If you want to buy a house worth £150k and you have a 5% deposit, your LTV is 95%. If you have a 10% deposit, your LTV is 90%, and so on. The lower your LTV, the lower the interest rates (and the lower the monthly repayments).Looking for a self-employed mortgage? Habito can help
Navigating the world of mortgages while you’re running your own business is a big task. That’s why it makes sense to work with a broker who understands the self-employed mortgage process, inside and out.
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