HIGH STREET LENDERS tend not to offer mortgages to the self-employed, contractors and freelancers without considerable paperwork and delay, if at all. This can be because they are not on PAYE or have what’s known as an “irregular income”. This doesn’t suit the high street lender criteria, which generally prefers to see a regular wage or salary coming in each month.
There are over 4 million self-employed people in the UK, many of whom mistakenly think their irregular income or lack of three years’ worth of accounts means they automatically don’t meet the requirements for a mortgage. But this is not the case.
If you’ve been put off from applying, it might be time to reconsider.
There are, specialist lenders who will offer mortgages to the self-employed with less stringent criteria, such as:
- Considering your contract value when working out how much you can borrow
- Averaging out your income over a period of time to smooth out any ups and downs
- Accepting two years of trading accounts instead of the normal three
If you are self-employed and looking for a mortgage, it’s important to speak to a specialist broker who can help you navigate the process and find a lender that is willing to accept your application.
While it may take a little more time and effort to find the right mortgage, it is possible to obtain the financing you need.
MORTGAGES FOR SELF-EMPLOYED BUYERS
Self-employed buyers (including sole traders, contractors, partners and directors of limited companies) have access to the same range of mortgages that any other buyer has. If your finances are in good order and you can prove your income, self-employment is unlikely to cause your application to be rejected.
You’ll simply need to provide different documentation, and perhaps more evidence of your income, than a buyer who’s in regular employment.
PROVING YOUR INCOME AS A SELF-EMPLOYED BUYER
The biggest obstacle you’re likely to face is proving your income. Lenders will want to see evidence of your earnings over at least the last two or three years, and preferably for longer if possible. This is because they need to be sure you can afford the repayments on a long-term basis.
Prior to 2011 self-cert mortgages were a popular choice for self-employed borrowers. These essentially allowed you to self declare your income! After being heavily abused, the Financial Services Authority effectively banned them.
Many people are confused about whether lenders use the gross or net profit figures. They will always use the net.
How you prove your income today depends on how you are self-employed.
- Sole traders (self-employed individuals) will be assessed on their most recent Self-Assessment tax return. This will show your total income, minus any allowable expenses, for the tax year in question.
- Partners (people who are in business with others) will be assessed on their share of the partnership accounts. These will show your total income from the business, minus any allowable expenses, for the accounting period in question.
- If you’re a shareholding director of a limited company, you will be assessed on your salary, dividends and annual company accounts. A few lenders will be happy to look at any retained profits or reserves within the business accounts.
- Contractors can be self-employed in many different ways. Getting a contractor friendly mortgage is important as not all lenders understand contractor income.
- CIS subbies can take advantage of their CIS status and apply for a CIS mortgage. A CIS mortgage is calculated using your gross CIS income, rather than the net figure that shows on an SA302.
DOCUMENTATION FOR YOUR MORTGAGE APPLICATION
As part of your application, you’ll need to submit the same documentation as everyone else. (e.g. proof of identity and address), as well as some additional documents.
Depending on your mortgage provider and self-employment status, you may be required to provide any of the following:
- SA302 forms: these are provided by HM Revenue & Customs and show your earnings in previous years based on your income tax self-assessment.
- Payslips and P60s: if you pay yourself a salary through your limited company, or are employed through an umbrella company, you’ll be asked for these as evidence.
- Limited company accounts: directors will usually be asked to show their limited company accounts for the last two years.
- Contracts: you might be asked to show documents proving your ongoing working relationship with clients and the agreed rates of pay.
- Bank statements: if you have a separate business bank account, be prepared to show historic statements for this, as well as your personal account. (Why do lenders ask for bank statements?)
IMPROVING YOUR CHANCES OF MORTGAGE APPROVAL
While there are no guarantees, there are a few things you can do to improve your chances of being approved for a mortgage:
REGISTER TO VOTE
This might sound like an odd one, but it’s actually important. Lenders use the electoral roll to verify your identity and address, so if you’re not registered they may view you as a higher risk.
CHECK YOUR CREDIT HISTORY
Lenders will also carry out a credit check as part of their assessment. It’s a good idea to check your own credit history before you apply, so you can view what the lenders will see.
It’s easy to request a copy of your credit file. If you spot any errors, you can dispute them and get them corrected.
Being self-employed makes it even more important to show that you’re good at managing your money, so you need to be aware of anything in your history that indicates otherwise.
PAY YOUR BILLS ON TIME
This might seem obvious, but it’s worth mentioning. Lenders want to see that you can manage your finances responsibly, so paying your bills on time is a good way to demonstrate this.
AVOID PAYDAY LOANS
If you’ve ever taken out a payday loan, now is the time to stop. Payday loans are viewed very negatively by lenders, as they indicate that you’re struggling to manage your finances. If you have any outstanding payday loans, make sure you pay them off well before you apply for a mortgage.
PREPARE YOUR DEPOSIT
The bigger your deposit, the lower the risk you pose to a lender. So, if you can afford to put down a large deposit, this will improve your chances of being approved for a mortgage.
Waiting until you have substantial savings will help your application. If family members are contributing to your deposit, make sure the money is ready to go before you apply.
Read more about saving for a mortgage deposit.
EXPERT BORROWING ADVICE
Obtaining a mortgage if you are self employed, a contractor or a freelancer is often less straightforward than for those people in full-time employment. So it pays to seek advice from a qualified mortgage broker with expertise in helping self-employed people.
