Not too long ago, securing a self-employed mortgage would have seemed near impossible. When earnings are less than certain, banks and other lenders can be tight-fisted before supporting a mortgage offer.
Thankfully, times have changed – largely because the number of self-employed people in the UK has risen from 3.3 million in 2001 to 4.8 million in 2017. That being said, the belief that you’ll be unsuccessful when applying for a mortgage without a fixed income persists.
So, to help challenge that belief and provide an insight into acquiring a property, we’ve broken down exactly how to get a mortgage when self-employed.
Who can get a self-employed mortgage?
Just because you are self-employed, does not mean you will not be able to get a mortgage.
It’s true that a substantial number of applicants are rejected for reasons including being self-employed. However, as long as your credit score is in good standing, you have proof of earnings, and you’ve got at least 5% of a deposit, you’re in a fair position to speak to a lender or a broker. Although a deposit of greater than 5% will help increase your chances of being successful in your search for a mortgage.
What documents do you need?
The documents you’ll require will vary between securing mortgages for sole traders and securing mortgages for freelancers if you’re operating through a limited company.
For the former, ensure that you have a minimum of one year’s finalised accounts (ideally three) or an SA302 form from HMRC dated less than 18 months old.
For the latter, you will need to provide a current contract (perhaps even 12 months’ worth if asked). In addition, you may be required to provide the last two years’ worth of fully signed accounts should you earn commission or bonuses.
The rest of the required documentation is relevant to both parties:
- Photographic ID – Should you present your driving licence, it must have your current address on it.
- Proof of address – Usually a utility bill, financial statement or a letter regarding council tax will suffice.
- Evidence of employment – Three to six months’ worth of payslips and P60s will be necessary here. Again, if commission or bonuses are relevant, some lenders will ask for up to two years’ worth of documentation as this will be considered as proof of income for mortgage applications.
- Personal tax returns – Similarly, self-employed workers should request a minimum of one year’s finalised personal accounts – although chances of success are much higher if you can procure up to three years’ worth.
- Bank statements – You may need three months’ worth of paper or digital copies of salary-fed bank statements, business bank statements and bank statements showing rental income if applicable.
- Deposits – As with anyone else, you must provide a statement that shows your funds, or an accumulation of funds. If these are gifted to you, you’ll need a statement letter from the gifter.
- Life insurance – If you don’t already have life insurance in place, lenders may request you get some and ask to see a copy of the policy summary.
How to prove your income
Mortgages for those who are self-employed will generally require two years’ worth of accounts. This can be backed up by a copy of your tax calculations (SA302) and an account overview from your HMRC online account.
Once you have this, rehearse your answers so that you can explain dips, peaks and any sudden changes that a lender may enquire after.
How to increase your chance of getting a mortgage
Lenders essentially use a self-employed mortgage calculator – or a loan-to-value (LTV) calculation – to determine what competitive rates you’ll be offered.
This is how much you’ll ask to be lent (loan) in comparison to the worth of the home (value) – the difference between the two is the deposit you’ll pay. The higher the LTV, the less favourable the rates.
You can therefore start improving your chances of getting a mortgage as a self-employed person by increasing your deposit amount. Reduce your spend on luxury items, and ensure you keep a hold of all business paperwork, accounts and electronic records to evidence your earnings thoroughly.
Lenders will be looking for red flags, so any big purchases that could disrupt your cash flow should be avoided for six months prior. Likewise, gambling and pay-day loans are a massive risk for lenders.
Common problems and how to overcome them
There are three snags that typically find themselves on the FAQ pages of mortgage lending and broker sites. These are:
- Only having one year’s worth of accounts – Yes, there’s a reduced likelihood you’ll be able to secure a mortgage as a self-employed individual without two years’ worth of accounts. But, if you’re newly self-employed, certain mortgage lenders will consider just one year’s worth of accounts.
- Limited company directors lowering their income too much – For tax purposes, directors will often prefer to pay themselves via a mixture of salary and dividends payments or retained profits. Some mortgage lenders will accept this as proof of earnings, although they may prefer you to maximise your income instead.
- Huge spikes in your income – Lenders will average out your earnings over the period you’ve displayed. Any spikes could skew this figure and leave you with a less-than-competitive rate. It’s for this reason that self-employed mortgage advice often includes trying to keep earnings steady in the lead up to your application.
How to apply
So, still wondering how to get a mortgage when self-employed? It’s simple. Firstly, speak to an authorised and regulated mortgage broker. They’ll be best placed to walk you through the most suitable mortgage rates for the self-employed.
Next (and this is the tricky part), secure all documentation relating to your trade. All paperwork, invoices, receipts – as long as it as evidences your profitability, you’ll need it.
Finally, tighten your spending in the run-up to any meetings with brokers or lenders to help build a rich history of your self-employment.
Where we come in
At GoSimpleTax, we’re able to collate and present your finances in a manner that makes your application easy. All the documentation you need for your Self Assessment tax return can be stored within our software.
Although not its primary function, our software can provide those seeking a self-employed mortgage with a way to view their invoices and receipts.
Get in touch with us today.
Last updated on 18th December 2019.