If you’re self-employed, getting a mortgage can be a lot more difficult than if you have a regular job. But it’s not impossible – there are ways to make it happen.
In this post, we’ll talk about the different things you need to do to get approved for a mortgage when you’re self-employed. We’ll also give you some tips on how to increase your chances of getting the loan you need.
So whether you’re just starting out in self-employment or you’ve been in business for a while, read on to find out more.
What counts as self-employed?
This may sound like a question with an obvious answer.
HMRC says you are self-employed “if you run their business for yourself and take responsibility for its success or failure”.
But mortgage lenders and brokers look at it differently, typically deciding that someone is self-employed if they own more than 20-25% of the business and it is the main source of their net income.
This will be the case if you are a contractor, company director or a sole trader.
Is it harder to get a self-employed loan?
Quite simply, yes – it is harder to get a self-employed loan. But while there are more steps in the process, it’s still achievable.
Some lenders don’t work with the self-employed because they prefer to have the reassurance of the regular income you get from being employed.
This means you may need to find a specialist broker, which we can help you with.
Self-employed mortgage vs employed mortgage
The main difference between a self-employed mortgage and an employed mortgage is the process of proving your income.
For employees, brokers will require you to provide 3-6 months’ worth of payslips and a copy of your P60 before starting the process.
But if you’re self-employed, you will be paying yourself and keeping track of your own income.
Mortgage lenders will need to see three years of your self-assessment tax forms as well as three years of your business accounts to make sure they match.
One common misconception about self-employed mortgages is that brokers and lenders will use your business accounts as proof of income. In reality, they’ll usually use them to check against your submitted tax return. Your proof of income will be determined by your self assessment tax return.
Therefore, we recommend you provide accounts that have been delivered by a qualified, chartered accountant, whose presence in loan processes tends to inspire confidence among lenders.
What documentation will I need for a self-employed loan?
To be eligible for a mortgage, you will need to prove that you have some form of reliable income.
As we mentioned, as a self-employed worker you will need to provide more documentation in your mortgage applications including:
- two or more years’ of certified accounts
- SA302 forms or a tax year overview from HMRC for the past 2-3 years
- evidence of dividend payments or retained profits (if you are a company director)
- evidence of upcoming work contracts
- lists of assets including savings accounts
- a list of debts and monthly payments for your business.
How to make yourself more attractive to self-employed mortgage lenders
There are a number of ways you can make your application more attractive for mortgages, mainly by getting and maintaining a strong credit history.
A good starting point is to talk to a mortgage broker about your options, as they may be able to point you towards specialist lenders if they cannot help you.
By paying off credit card debts or car loans and going into the mortgage application process with fewer monthly payments, your application should look more favourable.
Your eligibility will increase if you have a decent amount of savings in the bank, as this will show lenders that even if you encounter issues with your business, you have the funds to continue paying off your mortgage.
If possible, you should provide a higher down payment into the mortgage. The higher the equity invested, the less chance that the lender will back out of the mortgage if you run into any financial hardship.
To find out about self-employed mortgages, get in touch.