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Mortgages for the self employed explained

If you are self employed and complete your own self assessment, you will need to be able to demonstrate sufficient proof of your annual income if you want to get a mortgage

A ‘self employed mortgage’ is the same as a normal mortgage, but it can be harder to get your mortgage application approved if you are a freelancer, contractor or classed as self employed.

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In recent years banks and other mortgage providers have taken on additional precautions when it comes to deciding whom they lend money to and how much they are willing to lend.

Even if you are not self employed, with a fixed income and good credit rating, it can still be harder to get a mortgage than it was, say, ten or 15 years ago.

So if you are self employed and looking for a mortgage, banks are likely to be even more cautious about approving your application.

Self employed mortgages are harder to come by because banks see self employed people as more of a risk. Even if your income is regular, you will probably still have to jump through extra hoops in order to prove that you can afford to repay the mortgage debt.

Before making an application for a self employed mortgage, it’s important to ensure that your credit rating is in good order and that your proof of income shows you making a consistent amount of money over a prolonged period. At best, a few self employed mortgage providers will ask you to provide just 18 months of income records, but most others are will probably ask you for at least two years’ worth.

These additional checks are far more stringent than it would be for someone who has a permanent full time job. If you have a permanent full time job, you might only be asked to show three months’ worth of income, for example.

In this guide we explain what you need to do to properly prepare for a self employed mortgage application and how the way you arrange your business alongside your finances can impact the likelihood of being approved or rejected.

Self employed mortgages

How do I get a self employed mortgage?

Prior to the additional checks now placed on all mortgage lending, self employed people, as well as contractors and freelancers were able to ‘self-certify’ a mortgage. This means, you could self certify your own income, instead of having to provide payslips and bank statements proving your income to the lender.

This was useful because it meant that if you were self employed and earned, say, £70,000 a year, but made a loss in the months between January to March, for example, you would still be able to make a case for getting a mortgage as you were sure you would still be able to make the rest of that salary in the remaining months of the year.

However, if the rest of the year did not work out for you the way you expected and you made less money – less than what you could afford in monthly mortgage repayments – then the bank could repossess your home.

Unfortunately, these days, while banks do take extra precautions to try to make sure the latter scenario does not happen, you do have to ask the lender to certify your income. As mentioned previously, most self employed mortgage lenders want to see payslips and bank statements going as far back as two years, sometimes as a minimum.

On the one hand, you might have only been self employed for a year, and will certainly struggle to find a mortgage, but on the other if you have been working self employed for over two years, then any fluctuations in your income can be accounted for and hopefully better understood by the mortgage lender.

To make things easier, you should consider employing an accountant to handle your taxes at the end of each year. This will make it easier for you when applying for a self employed mortgage, as you can easily get all the necessary documents showing your annual earnings after tax.

Mortgage providers for self employed applications often like to see proof of regular employment, so any emails asking you to work or proof of work lined up over the next few months should improve your chances of being approved for a mortgage.

Naturally, like with any standard mortgage, a sizeable deposit will count heavily in your favour, giving you access to some of the best self employed mortgage deals. Aim to have a deposit worth at least 20% of the property value, but sometimes 10% will be enough if you have sufficient proof that your salary will be able to keep up with the monthly mortgage repayments.

Having a deposit of around 40% will give you access to the best deals on the mortgage market, but like with any mortgage application, having enough income and good credit rating is often just as important. Read on to learn how to best prepare your self employed mortgage application.

Preparing your self employed mortgage application

There are three main ways that you could have your self employed business set up: Sole trader, Partnership, and Limited company.

No matter how your business operates, it is going to be easier when preparing your self employed mortgage application if you have an accountant to provide you with two years of accounts showing your self employed company’s profits and any dividends, that you as shareholder have received.

If you are a sole trader, you may do your taxes yourself through the HMRC self assessment website. You will probably receive a document from HMRC called SA302, which shows how much income you have received and how much tax was due. Keep this handy for your mortgage application as your lender may need to see it alongside your proof of income.

If your self employed business operates as a partnership, then you will need your accounts to clearly show the portion of the business’s income that belongs to you. It might be easier to have an accountant do this for you to minimise discrepancies in your self employed mortgage application.

Lastly, if your self employed business operates as a limited company, then you will need to have proof of your income as director of the company as well as proof of the dividends paid to you as the majority shareholder of the company.

Self employed mortgage application tips

If you are self employed it generally makes most sense to separate your business from your personal affairs when applying for any type of loan. This means that if you have a credit card or loan that you took out for the sole purpose of using for your self employed business, then it should be in your company’s name, rather than yours personally.

This is a useful precaution to take just in case you are late with repaying your loan or run into any other difficulty with your business debts. That way, if you have managed to build up a good credit rating for yourself personally, then it will be protected if you have any financial trouble with your business.

In addition to this, it is worth remembering that as a self employed business you are likely to have your taxes organised in a way to reduce how much you pay at the end of the year. One of the ways to do this is to give yourself a low salary and pay yourself the rest of the income through a dividend, or the paying out of the company profits.

However, this combination of salaries may not be entirely clear to a mortgage lender, as it can look like that you have a low income, so having it explained in a document by an accountant should make the self employed mortgage application process a little less complicated.

Read more…

  • Getting a mortgage when you’re older – Once you’re over 50 your mortgage options begin to change, so it’s worth carefully considering your options.
  • What size mortgage can I get? – Finding the right size of mortgage you can get before you start house hunting is a sensible move to help you set your budget.
  • First-time buyers – Buying your first home can be both exciting and daunting, but thoroughly planning your finances can keep you on track.

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