Guide to self-employed mortgages
It can be more challenging to get a mortgage if you are self-employed, a freelancer, sole-trader, contractor, company director, or entrepreneur. If you are self-employed, your income might be considered less secure and less predictable. The security of your income can put lenders on the back foot because they want to know that you can make the long-term repayments of the mortgage they offer.
Good news – you can get a mortgage and Friends Capital can help you!
Before making a mortgage application, you should consider some careful planning, which will improve your chances of being approved. You will want to prove to a mortgage lender that you generate a regular income. Plan and speak to a financial adviser, a mortgage decline can damage your credit score.
What mortgages are available for the self-employed?
You may have heard about or previously had a self-certification mortgage, sometimes abbreviated to self-cert. For these mortgages, there was no need to provide evidence of how much you earn each year. However, these were banned in 2014 over fears that people were offered mortgages that could not afford.
Today, there are no mortgages designed for self-employed people. Instead, you have access to the same mortgages as everyone else. The lender will want to make more in-depth affordability checks, and they may offer you fewer mortgage options.
How to get a mortgage if you are self-employed
A mortgage lender will consider you as self-employed if you own 20% to 25% of a business or more, and this generates your primary income.
Before applying for a mortgage, you should prepare two years of certified accounts, and the most recent of these needs to be no more than 18-months old. It is a good idea to hire a qualified chartered accountant to prepare these for you, to ensure they meet lender requirements.
A qualified accountant will also help you understand your finances so that you can answer questions from the mortgage provider. If you do not know what a mortgage lender might ask, then mention this to your accountant, who will likely have experience in this.
Preparing supporting documentation should include requesting an SA302 form from HMRC. An SA302 form shows the income you have reported to HMRC and takes approximately two weeks to arrive. You should also prepare evidence to show retained profits or dividend payments and proof of upcoming contracts.
SA302 application: You can apply for your SA302 form from the HMRC here.
If you have been self-employed for one year or less, then it may be more challenging to get approved for a mortgage, but not impossible. In this case, it can help to provide proof of future commissions.
Further documentation that will help you get a self-employed mortgage include:
- Driving license
- Passport
- Six months of bank statements
- Council tax bill
- Utility bills for the last three months
It would be best if you were prepared to answer questions on:
- Car finance arrangements
- Loan repayments
- Store card and credit card repayments
- The cost of your commute
- Business-related travel costs
- Childcare
- Holidays
Tips for getting a mortgage if you are self-employed
Here we take a look at tips that will help you get a mortgage if you are self-employed.
Make your spouse the first name on the mortgage – This tactic can be beneficial, even if your spouse’s salary is less than the income you generate. Lenders are looking for a predictable and regular income, and this can be preferred over the amount of income earned.
Boost your income – You can opt to pay yourself a higher salary instead of keeping profits in the business. You can use this to boost your savings, and you can return to your regular salary arrangements after your mortgage gets approval.
Pay a more substantial deposit – You can reduce the monthly repayment from a mortgage lender by paying a larger deposit. With a lower regular repayment, your lending risks are reduced. You can also benefit from cheaper rates when your deposit exceeds 10 percent, 25 percent, and 40 percent of the property’s purchase price.
Check your credit rating – You can get your credit report for free and correct any errors that may appear. Mistakes can exist in your credit file, so you should not overlook this tip, even if you think you have not made credit-damaging mistakes in the past.
Postpone changes to your business – Mortgage lenders are looking at how predictable your salary is. Hence, it makes sense not to change the type of business you have or to switch from being a partnership to a limited company or sole trader.
Use a broker that is a self-employed mortgage specialist. A broker that specialises in and has experience in mortgages for self-employed people can be highly advantageous. A self-employed mortgage specialist can anticipate problems that you might incur and counter these before they become an issue. A specialist broker will also know the lenders who are most likely to lend to self-employed people.
Mortgage brokers that specialise in self-employed mortgages will know the different criteria that lenders favour. Some mortgage lenders prefer to see evidence of operating profit and retained profit. In contrast, other mortgage lenders prefer to see proof of salary and dividends. With access to this knowledge, you will increase the chance of being approved the first time.
Apply for a mortgage from a provider that is not a mainstream bank. When high-street banks refuse to lend to self-employed people, it is possible to turn to a specialist lender. Specialist lenders may lend to self-employed persons; however, a favourable mortgage decision may come at the cost of incurring a higher interest rate.
For more help and advice on applying for a self-employed mortgage, contact Friends Capital today.