Self Employment and Mortgages
Common questions about getting a mortgage when you are self employed
Self-Employed people often worry that getting a mortgage could be challenging. But if you have all your documents in order it should be plain sailing. Let’s look at how lenders assess your income and what you can do to get ready.
Being Self-Employed doesn’t require you to use a different type of mortgage to any other applicant and there are no mortgage products aimed specifically at Self-Employed people. It’s possible that the confusion about Self-Employed mortgages lies in the fact that the application process is slightly more arduous than it is for a traditionally employed person.
Despite the substantial increase in Self-Employed business owners and Freelance workers in the UK, income derived from self-employment is still considered to be less stable. Mortgage Lenders therefore see Self-Employed applicants as more of a risk to their lending and seek extra proof of income in order to mitigate some of that perceived risk. This proof will need to evidence your earnings for two to three years, in order that they can determine an average standard income for you.
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Self Employment
FAQ
What counts as self employed?
Mortgage lenders generally consider you as Self-Employed if you own more than 20% of a business that provides your main income.
Self-Employed borrowers can be Sole Traders, company directors or contractors. The way your company is set up can affect how you prove your income.
Why is proving income so important?
For any mortgage your annual income is crucial information, as it’s what most lenders use to work out how much to lend you. In general, you can usually borrow around four to five times your income.
This is important for Self-Employed mortgage applicants, as your income can vary year by year. That’s why a mortgage provider will often ask for a couple of years’ business details – it helps them understand your average income.
To prove your income, you often need to provide your financial accounts, your self assessment records, plus business and personal bank statements. Lenders will also look at your credit score to check for past debt issues.
Proving your income as a sole trader
As a Sole Trader – or a partnership – your business profits are your income; there’s no separation between your business and your personal finances. Lenders will usually look at your self-assessment SA302 forms to understand your earnings year by year, and may request up to three years’ details. You can access these from the HMRC website.
Proving your income as a company director
For a Limited Company you will need to provide certified accounts for the last one to three years, each stating your annual salary. You might also need to supply P60 forms or tax calculations.
An important consideration for Limited Companies is that each lender can have different ideas of what they accept as ‘income.’ Some will only accept your stated salary – which is often a low, nominal amount in a small business. Others will accept dividends too. Meanwhile some specialist lenders will also look at the net profit in your business to calculate your loan amount – which often means you can borrow a lot more.
Proving your income as a Contractor
While some lenders will treat contractors as limited companies or sole traders, others may have specific contractor assessment criteria. These lenders may calculate your income based on your day rate. This can often mean you can borrow more, as they are looking at your gross income rather than post-tax profits.
A contractor mortgage might have a minimum requirement for steady income – commonly two years. You will usually need to supply details of your current and previous contracts.
Do Self-Certified Mortgages still exist?
A decade or so ago, Self-Employed people would rely on Self-Certification mortgages to buy a home. These didn’t require any proof of income – the borrower simply just signed to confirm their annual earnings.
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As part of a crackdown on lending after the credit crunch in 2008, the Financial Conduct Authority banned Self-Cert Mortgages. The main purpose of confirming income as part of the mortgage application is to ensure that people can afford to repay their loans.
How do I get a mortgage when Self-Employed?
The Self-Employed follow the same process to find a mortgage as everyone else. The first step is to find out how much you could borrow. Talk to a Mortgage Broker or use a mortgage calculator to set your property budget.
Next, obtain an Agreement in Principle from a Mortgage Lender. This is a statement of the amount they are prepared to loan you. An Agreement in Principle makes you a credible and appealing prospect to vendors when you make an offer on their property.
After your offer is accepted, you progress with the mortgage application and provide the documentation required. If you meet all the criteria, the mortgage should go through.
How do I improve my chances of my mortgage application being approved?
The secret to gaining mortgage approval is to make sure you meet all the lender’s criteria – which look at everything from credit ratings to property details. By choosing a professional Mortgage Broker like Henden Financial Limited you can leave all the research and recommendations to us. We’ll even help you apply for the mortgage and get all the documents together.
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Henden Financial Limited is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Henden Financial Limited is registered in England and Wales. Call us today for a free initial consultation.
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What specific documents do you need?
Depending on the type of Self-Employed income stream you have, you will need to fulfill slightly different criteria in terms of the documentation you need to submit to prove your income.
Usually, regardless of your employment type, the lender will need to be satisfied that you have a substantial history of employment in your current role and they will be looking for two to three years as a minimum. Some Limited Company Directors and other types of Self-Employed applicants in particular careers may be able to get a mortgage offer with as little as one year’s proof of income, however, the interest rates are likely to be higher to reflect this flexibility.
Alongside the standard identity documents that all applicants will need to provide, such as proof of address, lenders will accept the following documents for proof of income:
What specific documents do you need?
Limited company director
As a Limited Company Director, the income that lenders will consider against your mortgage application is usually your personal salary and dividends. A few lenders will also consider your retained profits alongside this, but this is less common.
In order to evidence this, you will need to provide three year’s worth of certified accounts and SA302 tax calculation forms. Your business bank statements may also be requested, as well as a business plan to prove your future earning capacity, if you have a shorter trading history.
Partnership
As a part owner of a business, you must own at least 25% for your income to be considered in support of your mortgage application. Your share of the net profits will be used if you meet the minimum ownership requirement.
Proof of income is usually the same documentation as required by Limited Company Directors.
Sole traders and freelance workers
Lenders tend to use an average of your income over the last two to three years, depending on their specific criteria, to calculate your mortgage allowance. Some may consider using the latest year’s figure, but this is less common.
You will need to provide SA302 forms for the requested tax years to prove your income.
How do you improve your chances of being accepted by a lender?
When applying for a mortgage as a Self-Employed applicant, one of the best things you can do to improve your chances of satisfying lender criteria is to ensure you prepare in advance. The following preparations are recommended
Credit Score
A good credit rating is beneficial to all mortgage applicants, regardless of their employment type. Some simple ways you can improve yours are:
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Make sure you are on the electoral roll at your current address
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Pay off existing debts as far as possible
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Ensure utility bills and credit card repayments are timely
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If you have credit arrangements, stay well within 50% of your limits and don’t apply for any additional credit
Deposit
If you can afford to offer more than the minimum deposit requirement on your chosen property, this will improve your favour with the lender. It reduces some of their risk, which also potentially gives you access to better interest rates.
Financial Preparation
If you don't already use an accountant for your business finances, ensure that you have your finalised accounts for the requested tax years signed off by a certified accountant.