Mortgages for the Self Employed – The Facts
What is a Self-Employed Mortgage?
In this article I want to break through the many myths around getting a mortgage if you’re self employed. I’ll also be answering the most common questions that I receive on this topic.
So let’s get started with the first, most fundamental question. What is a Self Employed Mortgage?
The quick answer is: there is no such thing as a self-employed mortgage.
By applying for a mortgage, you’ll be applying for many of the same mortgage products as everyone else. The only difference is the level and type of evidence you need to support your application… We’ll cover this in more detail later.
Now there are some products on the market that have been created by specialist lenders that are dedicated or aimed at the self-employed but you are not restricted to these products by any means.
Side Note: Self Cert Mortgages:
What are they? – These were specifically created to allow self-employed individuals to self certify how much they’d earned in any given year, WITH NO EVIDENCE.
Are they still available? – No. In 2014 they were banned because of concerns that lenders were lending more than borrowers were able to repay.
Is it harder to get a mortgage if you’re self-employed?
Not necessarily. As I mentioned above, the main difference in your mortgage application to everyone else will be the type of evidence you need to provide to support your application.
This is where it is absolutely essential to choose a mortgage advisor who is well schooled in mortgage applications for the self-employed.
Not all advisors out there understand this area well, so do your due diligence and research before selecting your trusted advisor.
So What Are Lenders Looking For?
Let’s answer this question by going back to first principles.
In order to qualify for a mortgage product you’ll need to demonstrate that you have a reliable source of income and that you can afford to meet the repayments.
Demonstrating a reliable income is largely dependent on which type of business you are operating. We’ll cover some detail below but it’s always best to speak to a trusted mortgage advisor to guide you.
Demonstrating Earnings – What income you can use in your application
Almost all lenders will be looking at the profitability of your business over a period of time to demonstrate your earnings potential.
If you are a sole trader, this will be as simple as looking at the net profit over the past 3 years. Ideally you’ll be able to demonstrate a stable income over recent years, you may need to do a bit extra work if you have a wildly changing income in our business (see below for more information).
Similarly, if you are a contractor or a freelancer you can use your day charging rate multiplied by your expected working days. You may also need to back this up with evidence of upcoming contracts and previous history.
If you operate under a limited company remember that lenders can consider the following sources:
- Salary taken from the business
- Dividends paid from the business
- Your share of retained earnings in the business.
Most lenders will be looking to review the past 3 years worth of accounts to prove that you/your business has a proven track record of producing a reliable income in recent years.
There are other measures that you can take to demonstrate reliable income, particularly if you don’t have 3 years worth of accounts to submit.
Lenders may be satisfied if you can provide evidence of contracts for future work that have been signed.
To demonstrate affordability, lenders will often pass your data through an affordability calculator. You can find one online yourself with a cheeky google.
These calculators will take into account your personal outgoings such as:
- Household bills
- Credit Card repayments
- Car Finance
- Other loans/finance agreements
Therefore there is a lot you can do in this area to improve your chances of passing the affordability calculator. More on this later.
What Evidence Do I Need to Provide?
This very much depends on how you answered the above questions and is linked to the type of business you have and how much historic records you have available.
Sole-Trader / Freelancer:
You’ll be needing as a minimum SA302 forms (personal tax returns) for whatever history you have (up to probably 3 years).
You may also need to provide certified copies of your trading accounts.
You’ll need to provide certified copies of your limited company accounts for the last three years (or however much you have).
You’ll probably also need to provide copies of your personal tax returns also (SA302 forms). Additionally you may be required to evidence your dividend payments (you can use dividend certificates or bank statements for this).
Again the evidence you need, very much depends on your sources of income and the history you can provide.
You may need to provide evidence of upcoming contracts, particularly if you are a contractor.
Similarly if you have rental income from buy-to-let properties, you may also need to provide tenancy agreements.
Finally, you’ll need to provide the same level of other information as the non-self employed. Expect to need to provide evidence of your Identification, Proof of Address, bank statements, proof of your deposit and finally evidence of life insurance if required.
How Can I Improve My Chances of Getting a Mortgage Approved?
Hire a Mortgage Advisor
Without a doubt, the best thing you can do to improve your chances is to speak to a trusted mortgage advisor who has a good track record with mortgages for the self employed.
They will be able to guide you through the process and give you advice tailored to your circumstances on the various products most suited to you and how you can best structure your application for success.
Hire an Accountant
Next, ensure that your accounts are prepared and certified by a qualified accountant. These will give lenders greater confidence in your financials and speed up your application.
You’ll want to pay attention to a few details here with your accounts. Firstly, it’s not uncommon for your accountant to prioritise a lower tax bill for you by finding ways (all perfectly legal of course) to reduce your net income. This may hurt your mortgage application, so be sure to communicate to your accountant your intentions before they file the financial statements on your behalf.
Secondly, if you have dramatically varied income in your business over the last 3 years, you’ll probably need to rely on proof of future income (upcoming contracts etc).
Generally speaking, ideally your financial statements will show a track record of stable, yet steadily increasing income from your business.
Get a Decent Deposit Together
It’s easier said than done. But as with any mortgage application, your changes are greatly improved (not to mention your monthly payments greatly reduced) if you can save up a reasonable deposit beforehand.
But as with your accounts, preparation is key here. If family members are gifting you funds for your deposit, you’ll need evidence of the gift. Make sure you get this in writing ahead of your application.
One thing worth mentioning is that mortgages today are a maximum of 95% loan to value. This means that you can buy a home with as little as 5% deposit. You’ll need to speak to your friendly mortgage advisor to check if you are eligible.
The higher your deposit however, the better your chances are of passing affordability tests..
Check your Credit Score / Improve your finances
Your credit rating is a significant factor in determining your credit worthiness and your mortgage rates. Make sure you check it in advance and make steps to improve it.
Ensure there aren’t any erroneous adverse entries, and if necessary make changes to your finances to improve your score.
On this front, it’s highly advisable that you scrub your finances with a view to affordability prior to applying for a mortgage.
Given that you’ll need to provide bank statements for the past 3 months, you’ll want to make sure you organise yourself so that these changes are implemented in good time.
What do I mean by a good scrub?
Run through your bank statements and check for subscriptions/gym memberships etc that you don’t need or no longer use and cancel them.
If you can, repay any outstanding loan balances, or try to reduce them as much as possible (but beware of early repayment charges on structured loans).
Build a household budget with a view to affordability and stick to it.
These are all things you should do periodically regardless of your mortgage application and go a long way to helping you stay financially healthy.
How We Can Help
At Henchurch Lane we have extensive experience dealing with mortgages for the self-employed. We have access to a wide variety of suitable products and have a great deal of knowledge on the requirements of different lenders.
You can reach out to me at my Facebook Group Paul Holland Does Mortgages. Here you can also stay up to date with market news and educational content for all you need to know about mortgages.