If you’re self-employed and looking to get a mortgage, you might think it’s a tricky process, especially if you’ve only got one year of accounts.
Normally, lenders like to see two or three years of accounts to feel confident about your income. But, here’s some good news: even with just one year’s worth of accounts, getting a mortgage is still possible.
In this guide, we’re going to talk about how you can get a mortgage if you’re self-employed – like if you’re a sole trader, contractor, freelancer, or run your own business.
We’ll look at what lenders want to see, how to prove your income, and how a mortgage broker can make things easier for you. We’ll also give you some tips on making your mortgage application stronger, so you have a better chance of getting your mortgage approved.
Understanding self-employed mortgages
As someone who’s self-employed, you can access the same types of mortgage deals and rates as someone with a regular job.
But here’s a little secret: there’s no special product called a ‘self-employed mortgage‘.
This term is just a way of talking about mortgages that are a bit more tailored to the unique income patterns of self-employment.
Now, it’s true that different lenders have different views on self-employment. Some might be a bit more cautious and see it as a higher lending risk compared to a regular salary.
But the real task is finding those lenders who get what self-employment is all about and are ready to offer you a mortgage that fits your needs.
Self-employed mortgages with 1 years accounts
Most lenders prefer to have 2-3 years of accounts before lending to someone who is self-employed.
The reason comes down to risk.
With only one tax return/SA302, it is much more difficult for lenders to work out your mortgage affordability. They will be worried that your income could be unreliable which would affect your ability to make the monthly payments.
Fortunately, there are a number of lenders that will approve a mortgage based on having just one years worth of trading.
These tend to be the smaller, specialist lenders, and you’ll need to work with a broker to get access to them.
With only 12 months of accounts to go on, the lender will want to find out more about your situation. Expect them to ask for personal and business bank statements, get a projection from your accountant, and maybe request your experience in the field you now work in.
If this sounds all a bit much, don’t worry.
Your mortgage broker can help to gather the right information and check it over before sending to the mortgage company.
Got 2 years of accounts? You might find this more useful.
Who can apply?
A mortgage of this type is designed with self-employed people in mind.
This would be sole traders, contractors, freelancers and business owners who typically do not have a fixed income.
Lenders who accept self-employed applicants will assess your mortgage based on your SA302 figures and may also ask your accountant for a projection.
If you are a company director owning less than 20% in shares, you would normally be treated as a PAYE paid employee.
Share ownership of 20% or more will require a self-employed assessment but this also means you can bring in any retained company profits to boost your borrowing power.
Specialist lenders (& brokers)
If you only have accounts for one year then some lenders might not consider you. Most banks prefer to see 2-3 years of financial records.
However, specialist lenders are more familiar with the details of self-employment and are more willing to take on the extra risks involved.
A specialist mortgage broker, who has a lot of experience with these cases, can help you connect with various specialist lenders who typically deal only through brokers.
Mortgage eligibility
Being eligible for a mortgage and then making a successful application means ‘ticking’ lots of boxes. Here’s a brief guide:
Time self-employed
You will need to have finalised accounts covering the full 12 months of being self-employed, plus corresponding SA302.
Having your accountant draw up a projection for year 2 will be helpful.
Deposit
The absolute minimum deposit would be 5% of the purchase price/value.
If you can get to 10% or above then you will have access to a wider range of lenders and cheaper rates.
Credit history
It’s always a good idea to get a copy of your credit report before applying for a mortgage.
Leave yourself some time to check everything’s OK and to fix any errors. If you have experienced bad credit then solutions are still possible.
Property
The lender needs to approve the property as well as the borrower.
If the property is of an unusual or non-standard construction, the you’re likely to need a specialist property lender.
Age
The minimum age to get a mortgage will be 18-21 depending on the lender.
For older borrowers, there’s also a maximum age on expiry of the mortgage term. This tends to be around 80-90.
Applying For A Mortgage
Our guide will take you through the process, explain all of the key stages and help you to better understand what’s required when you apply for a mortgage.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Proving your income
You will need to provide official evidence of your declared income for the first year. This is normally via personal or business accounts and HMRC SA302 forms.
Accounts
If you are running your own business, partnership or limited company all lenders will ask to see your official accounts. These will have been drawn up by an accountant and show earnings, expenses and profit.
You should also ask your accountant to provide a financial projection for the current year.
SA302
An SA302 is the official HMRC year end Tax Calculation that is based on your submitted self assessment information (your tax return).
If you are self-employed or a company director then you most likely need to submit a tax return every year that includes all of your income. The SA302 provides a convenient summary that is accepted by lenders as proof of your earnings.
How much can you borrow?
How much you can borrow will depend on 2 things: your provable earnings and your regular expenditure.
Lender’s will work on your personal gross income, before tax. This figure will come from your SA302.
They then multiply this figure by 4 to 4.5 times, maybe 5 times.
Then they look at your affordability, by checking what you currently spend your earnings on.
Why not try our mortgage calculator to see how much you could borrow.
Getting mortgage ready
Getting your finances in order before applying for a mortgage is one of the best things you can do. Whether you are buying your first home or thinking of moving somewhere new, there are a number of ways that you can improve your situation and speed up the mortgage process.
Getting mortgage ready means that you will be better organised and in a much stronger position when applying for a mortgage.
Being mortgage ready is more than just deciding to buy a house and get a mortgage. It’s about sorting your finances and getting organised so that you stand the best possible chance of being approved.
Being short on time, and without some of the required documents, makes the whole process stressful for everyone involved.
Wherever possible, start the process 3-6 months before you want to actually apply for a mortgage.
By planning ahead you will have enough time to understand what a lender will need to see and organise all of the necessary paperwork. When you start this process it might reveal things that need fixing or improving.
Think of it as getting match fit. You need to put the effort into training and getting prepared.
Having everything in order and in the right place will mean that:
- There’s less rushing around trying to find documents
- You will be in a stronger position than before
- You could have more deals to choose from
- It will be easier to apply for a mortgage
- It will be easier for a lender to assess your application
- You stand a better chance of getting what you want
Learn more: How to get mortgage ready
How a broker can help
Searching the mortgage market can be confusing at the best of times.
But for anyone that only has one or two years of accounts it can seem impossible.
Working with an experienced mortgage broker can help to ensure you only approach lenders that are likely to say yes. This reduces the chances of a mortgage rejection.
Whole of market mortgage brokers will have access to over 100 different lenders, from the well known high street banks, to the specialist lenders.
Their knowledge of self-employed mortgages means that they can find the one that suits you the best, regardless of the number of years accounts you have.
It’s quite common now for freelancers and those in self-employment to have several different streams of income. This is not a problem for a mortgage broker.
You won’t pay a higher rate just because of your self-employed status. However, you might have fewer lenders to choose from because of it.
If you are a construction worker and receive CIS slips or stubs then you may qualify for a CIS mortgage. This allows you to borrow using your gross income, and your slips as proof of earnings.
No. Banks do not favour one business type over another. They are interested in the level of risk you pose and whether your income is stable and predictable.
On the other hand, if your mortgage term takes you over age 65 this would be classed as borrowing into retirement. In these situations lenders will be assessing the likelihood of you working beyond this age, taking the type of work you do into consideration.
If a company director owns more than 20-25% of the business he works for then he is likely to be classed as self-employed.
It’s been a while since self-certification mortgages have been available.
The rules regarding prove of income have changed, you will now need to provide proof of your income for all mortgage applications.
There’s no quick answer to this. Some lenders will accept some levels of bad credit.
It depends on what the problem was and how long ago it happened.
Yes, but it won’t be easy.
You’ll need a good size deposit and an excellent credit history.
