Mortgages For The Self Employed
What is a Self Employed Mortgage?
A self employed mortgage is not actually a real type of loan. Lender’s will simply change their assessment process and offer you the same mortgage selection as someone in a standard PAYE position. However, to keep things simple we will refer to this as a self employed mortgage throughout the guide.
How to get a Self Employed Mortgage
Applying for a mortgage is a complicated process as it is and if you are self employed, it can be even more complex. It was however, quite easy to get a mortgage for self employed people prior to the 2008 credit crunch, when they could get self-certified mortgages by simply telling a lender how much they earned. But since the credit crunch, this is no longer possible, and lenders will now want to see extensive proof of income showing exactly how much you earn, before they will offer a mortgage to anyone self employed.
For an initial calculation of how much you are likely to be able to borrow, use our handy mortgage calculator.
Why is it so hard to get Mortgages for Self Employed People?
If you are self employed, lenders consider you higher risk than those employed with a stable monthly salary. Your income is likely to be more erratic and not guaranteed at any one level for a consistent period of time. Lenders prefer lending to people that they consider low risk.
That said, getting a self employed mortgage is possible but it is advised that you seek advice before you start making applications. You can get qualified advice from one of our expert mortgage advisers at any time.
What do you need for a Mortgage Application when Self Employed?
Mortgage lenders will want to see proof of your self employed income usually over a period of 1-3 years. How they assess your income differs depending on whether you are a sole trader, operate as a partnership, as a limited company or as a contractor.
For sole traders, the lender will consider the net profit of the business and for a partnership, they will look at each partner’s share of the profit along with any draws. If you are a director of a limited company however, lenders will typically consider your salary plus any dividends although some will consider retained profits. Contractors can get special treatment with certain lenders who may be willing to look at the daily rate of pay if the individual has a strong track record in their line of work.
The following is a suggested list of paperwork to collate together for your self employed mortgage application. This is just a guideline and lenders may ask for other information. When looking for someone to help you with your paperwork, bear in mind that most lenders will insist that accounts are prepared by an accountant who is chartered or certified:
1-3 years’ worth of accounts prepared by an accountant if part of a limited company
SA302’s for 1-3 years – this is the self-assessment form that shows how much personal income you declared to HMRC and how much tax you paid
Bank statements for 3 months
Proof of your deposit
Details of any debt repayments and other outgoings
If you don’t have 2-3 years of accounts as you haven’t been operating for long enough, then you may still be able to get a self employed mortgage if you can prove to the lender that your business is busy and there is plenty of work lined up and have completed the first year of trading.
Seek advice from our team of advisers who can offer advice and guidance about which lenders are most likely to lend to you.
Mortgages for Contractors
As mentioned there can be special rules put in place for contractors taking on project work or medium to short term placements. Some lenders are particularly flexible for IT contractors and have built up a good understanding of how their industry operates.
A lender is more likely to look upon you favourably if:
You have got a long time left on your contract before expiry
You have been with the same employer for a longer period of time
You have a history of renewals with the employer
You can get written confirmation of their intention to extend
You have been working within the same industry for a longer period of time
You command a significant daily rate of pay
How to improve your chances of getting a Self Employed Mortgage?
If you have an excellent credit rating, that will improve your position. Having a good deposit or a large amount of equity in a property will also help. Typically, the longer you have been trading for, as a self employed person the better, so sometimes it might be worth waiting a year or 2 before buying a house or making a move.
Make sure you business accounts are up to date and that there are no outstanding debts or late payments being made. A lender will check you as an individual as well as run a check on your business.
As lenders will generally assess how much they will lend you based upon your taxable profits or earnings, it may be worth considering a less aggressive tax strategy to show a larger taxable income. Of course this should be discussed with your accountant before making a decision on this.
Getting a mortgage is harder for self employed people but it is certainly possible. With self employed people making up about 14% of the UK workforce, the self employed mortgage market is a reasonable size and there are definitely competitive mortgages available. Remember to get your paperwork in order, consider your timing and most importantly, seek advice.