If you’re self-employed and looking to purchase or remortgage a property, you might have been led to believe that getting a mortgage is trickier than it is for traditional employees. Whilst there are some extra hoops to jump through, thousands of self-employed people successfully secure mortgages every year. Let us walk you through everything you need to know to make your application as smooth as possible.
Why it’s different when you’re self-employed
When you work for yourself, whether as a freelancer, contractor, or business owner, lenders can’t simply call up your employer and verify your steady salary. Your income might fluctuate from month to month, and you likely claim business expenses that reduce your taxable income. This makes lenders a bit more cautious, as they need to be confident you can afford the monthly payments, even during quieter periods.
The good news? Lenders have become much more flexible with self-employed applicants in recent years. They understand that self-employment is increasingly common and have developed specific criteria to assess your application fairly.
Getting a mortgage whilst self-employed
Let’s start with the positives. Being self-employed can actually work in your favour in several ways.
Firstly, if your business is thriving and you can demonstrate strong, consistent earnings, lenders will take notice. Some might even consider your projected future income if your business shows clear growth trends.
Secondly, you have more control over your financial documentation. You can work with your accountant to present your finances in the most favourable light, whilst remaining completely honest and transparent.
Finally, there are specialist lenders who specifically cater to self-employed borrowers and understand the nuances of variable income. These lenders often have more flexible criteria than high street banks.
What to be aware of
On the flip side, there are some challenges you may need to navigate.
The most significant hurdle is proving your income. Whilst employed people can provide a few recent payslips, you’ll typically need to show at least two years of accounts or tax returns. If you’ve only been self-employed for a short time, some lenders won’t consider your application at all, though others may accept one year of accounts in certain circumstances.
Another consideration is that many self-employed people claim legitimate business expenses that reduce their taxable income. Whilst this is smart for tax purposes, it also reduces the income figure that lenders use to calculate how much they’ll lend you. You might earn £50,000 but only show £35,000 in net profit after expenses, which means the mortgage will be based on the lower figure.
Additionally, you might face slightly higher interest rates or need a larger deposit compared to employed borrowers, as lenders perceive self-employment as slightly higher risk. However, the good news is that this gap has narrowed considerably in recent years!
What You’ll Need to Prepare for Your Application
Preparation is absolutely key to a successful mortgage application when you’re self-employed. Here’s what you should gather before you start the process:
- Tax Returns and Accounts: Most lenders require two to three years of tax returns (SA302 forms) and the corresponding tax year overviews from HMRC. If you run a limited company, you’ll need your company accounts prepared by a qualified accountant, including profit and loss statements and balance sheets.
- Proof of Income: Recent bank statements (typically three to six months) showing your business income and personal finances. Lenders want to see that money is regularly coming in and that you manage your finances responsibly.
- Business Evidence: Documentation proving your business is legitimate and ongoing, such as contracts with clients, your business bank statements, evidence of business insurance, and proof that you’re registered with HMRC.
- Identification and Address History: Standard documentation is also required like passport, driving license, and proof of address for the last three years.
- Deposit: Generally, you’ll want to aim for at least a 10% deposit, though 15-20% will give you access to better rates and more lender options.
- Credit Report: Before applying, check your credit report for any errors or issues. Address any problems you find, as a good credit score significantly improves your chances.
Key Things to Be Aware Of
Timing matters enormously. If you’re planning to apply for a mortgage, avoid making large business purchases or claiming excessive expenses in the year before your application, as this will reduce your declared income.
In order to help you avoid any challenges you may face during the application process, consider working with a mortgage broker who specialises in self-employed applications such as the team here at Emily’s Mortgage Services. We know which lenders are most likely to accept your specific circumstances and can navigate the more complex aspects of your application.
Be prepared for the process to take longer than it might for employed applicants. Lenders need more time to review your financial documents, so factor this into your home-buying timeline.
Different lenders calculate self-employed income in various ways. Some average your income over two or three years, whilst others focus on your most recent year. Some consider your gross income, whilst others look at net profit. A broker can help you identify which calculation method works best for your situation.
Final Thoughts
Getting a mortgage when you’re self-employed requires more documentation and patience, but it’s absolutely achievable!
The key is thorough preparation and realistic expectations. Start gathering your documents early, maintain good financial records, and consider seeking professional advice from both a mortgage broker and an accountant.
Remember, lenders want to lend money, that’s how they make their profit. If you can demonstrate that you are a good borrower, have a stable, sustainable income and can afford the repayments, being self-employed shouldn’t stand in your way of homeownership. With the right preparation and approach, you’ll be holding those keys to your new home before you know it!
Emily's Mortgage Services LTD 