Whether you're a sole trader, small business owner, or a contractor, getting a mortgage when you're self-employed can seem like an uphill battle.
In this article, we'll take a look at some of the documentation you'll need to have prepared, so you're in the best position to get a mortgage and take your next step on the property ladder.
Yes. It is possible to get a mortgage if you're self-employed. In most cases, if you can prove your income and meet the affordability criteria set out by the particular lender, you'll be eligible for exactly the same mortgages as those who aren't self-employed.
In fact there are no particular mortgage products just for self-employed people. Self-certification mortgages (also known as self-certified mortgages), which previously allowed self-employed workers to declare their income without lenders, were banned in 2014. This was a consequence of the mortgage market review, over worries that borrowers were taking out mortgages that they could not afford in the long term.
A mortgage lender will class you as 'self-employed' if you own more than 20-25% of a business from which you earn your main income. This is the case whether you're a company director, sole trader, or contractor.
If you do a self-assessed tax return for your main income stream each year, chances are you'll be classed as self-employed by a mortgage lender.
As long as you can prove you're eligible, and can afford repayments, you should be able to borrow the same amount as someone with a PAYE income. Generally this amounts to between 4 and 5 times your annual income, with most mortgage lenders capping lending at 4.5 times your annual income. So, if you earn £30,000 a year, you should expect to be able to borrow around: £135,000.
If you're self-employed, your annual income will usually be based on an average of your profit from the past 2 or 3 years.
If you're unsure about how much you'll be able to borrow, it can be worthwhile getting financial advice from an independent adviser or a mortgage broker. They'll be able to look at your income over the past few years, and let you know what amount you'll be able to borrow.
No, mortgages for self-employed people are not more expensive than 'normal' mortgages.
Most lenders don't have specific products for self-employed borrowers. You'll apply for the same products and terms as borrowers with PAYE income. This means you'll pay the same interest rates, and product fees.
When it comes to the cost of a mortgage - particularly the interest rate you'll pay - it's not just your income that has a significant impact. Lenders will also look at:
The mortgage application process is the same whether you're a self-employed applicant or not.
Mortgage in principle
A mortgage in principle (otherwise known as an agreement in principle) is a preliminary statement from a lender saying they're willing to lend you a certain amount of money before you finalise your home purchase.
During the application, the lender will ask you about your situation, including your income and goings, before providing you with a maximum figure they are willing to lend. The lender will carry out a 'soft' credit check on your credit history to decide whether you're a suitable applicant. Checks with a formal application are much more rigorous.
While a mortgage agreement in principle isn't an official mortgage approval, you can use it as proof that your lender is willing to lend you money. This can be helpful when you're looking to purchase property.
In a formal mortgage application, your lender will consider a variety of factors before they provide you with a mortgage offer.
To decide if you are legible, the lender will carry out a 'hard' credit check. This allows the lender to take a full look at your report and leave a search footprint. This footprint indicates that an application for credit has been made.
Lenders will also reevaluate the amount you want to borrow and carry out ID checks on your person. Like a mortgage in principle, they will ask for a general overview of your financial position.
The lender will decide whether you can afford monthly repayments. This is known as 'stress testing'. They may ask about: household bills, childcare, holidays, socialising, hobbies, any credit repayments, and car finance repayments. They will also take a look at your bank statements to get a sense of your monthly income and outgoings.
The lender will send a surveyor to look at whether the property you want to buy is good enough security for the loan. If it meets lending criteria, the surveyor will confirm its legibility with the lender.
To ensure your property has an accurate valuation, you should use an estate agent you trust. The best way to find a worthwhile agent is by comparing agents in your local area. You can do this for free by using our agent comparison tool.
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Extra information if you're self-employed
If you're self-employed, you will need to provide some additional information to prove your income. You will need 2 or more years' certified accounts, SA302 forms or a tax year overview. If you're a contractor, you'll need evidence of upcoming contracts to prove your business is viable.
Acceptance or rejection
If your lender is happy with your application, they will approve your mortgage.
While most mortgages are accepted after a mortgage in principle, there have been instances of rejection. If your offer is rejected, it usually means the lender's hard credit check revealed something they didn't like in your report.
You can read our blog to find out what you can do if your offer is rejected after receiving a mortgage in principle.
When applying for a mortgage you'll be asked to provide a variety of documentation in order to prove your identity and financial eligibility. Everyone applicant will need to provide the following for review:
Self-employed mortgage applicants are usually asked to provide the following additional documentation:
Note: If you're self-employed, lenders tend to prefer evidence that has been prepared by a certified or chartered accountant.
There are a few ways to increase your chances of getting approved for a mortgage:
Because a self-employed income is more variable, lenders generally like to see accounts covering a minimum of two years.
The larger the amount of money you're able to put forward upfront, the more likely your lender will approve your application.
You can increase the chances of your mortgage being approved by boosting your credit score. Making payments on-time and keeping credit utilisation low, are great ways to boost your credit score in a short amount of time. Registering to vote is another quick fix, as the electoral roll proves your name and address.
If something goes wrong with your mortgage application, a specialist broker will assess your application and will help you to quickly locate a lender that is likely to lend. If time is of the essence, a broker can be seriously useful.
Accountants assess your finances and locate potential shortcomings that could affect your mortgage. For example, if you don’t have separate bank accounts for business and personal spending, they can help you set them up. They can also offer advice on whether your business set-up is ideal, especially with tax efficiency.
It takes 2 minutes. 100% free. No obligation.
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