If you’re looking at your options for a self-employed mortgage or just want to understand how the process works, then keep reading. I’ll share with your some valuable tips so you’ll know what information you’ll need and how you need to present your self-employed income. I also share some tips on preparing your business finances to maximise your chances of successfully getting a mortgage if you’re self-employed.
Table of contents
- 1. What is a Self-Employed Mortgage?
- 2. How Much Can You Borrow if You’re Self-Employed?
- 3. Are Mortgages More Expensive if You’re Self-Employed?
- 4. What Documents Do You Need For a Mortgage When Self-Employed
- 5. What Documents Do You Need For a Mortgage If You Have a Limited Company
- 6. How to Improve Your Chances of Getting a Mortgage if You’re Self-Employed
- 7. Can You Get a Mortgage With One Year Accounts?
1. What is a Self-Employed Mortgage?
First of all – there is no such thing as a self-employed mortgage! When it comes to buying a house, you can apply for the same mortgages as anyone who has a regular job with a payslip. It’s just that because you’re self-employed, the way you earn your income and provide evidence to show you can make monthly repayments on your loan works differently. It’s all to do with risk. Lenders need to feel confident that the person borrowing the money will be able to make the monthly mortgage payments. Unfortunately, the perception by lenders is that when you work for yourself your income can fluctuate. Which in turn could affect your ability to repay a monthly mortgage.
But, it is somewhat unfair given that a lender will look at 3 months payslips for someone who is employed but want up to 3 years accounts for someone who is self-employed.
2. How Much Can You Borrow if You’re Self-Employed?
The amount you can borrow is usually 4 or 5 times your average earnings for the numbers of years income you are presenting. However, this will vary from lender to lender and according to the number of tax returns you can present, size of deposit and borrowings can go up to 5 or 6 times income depending on your status. Some lenders will then take off other debts you have, reducing the amount you can borrow.
3. Are Mortgages More Expensive if You’re Self-Employed?
If you are self-employed, you’ll be taking out the same mortgage as anyone else. Therefore, the amount of interest you’ll pay will depend on the deal you are eligible for. The reality is that the less deposit you have, the worse your credit score. Or, with fewer years of accounts, you may find yourself having paying a higher interest rate on your mortgage to reflect the risk the lender sees in your case.
4. What Documents Do You Need For a Mortgage When Self-Employed
All lenders vary but in general, you’ll need the following information when it comes to applying for a mortgage if you’re self-employed:
- Personal identification including photo ID and proof of address such as a passport or driving licence
- At least 1 years accounts. However, possibly 2 or 3 years, depending on the lender you are considering to calculate your average income and achieve better mortgage rates (possibly signed off by an accountant);
- A bank statement proving you have your deposit ready;
- SA302 tax calculation & tax overview which shows how your tax is calculated and that you have paid all the tax you owe;
- At least 3 months of personal bank statements to show your PAYE salary being paid if you are employed and details of your personal spending.
5. What Documents Do You Need For a Mortgage If You Have a Limited Company
If you have set up a Limited Company, then a majority of lenders will want to focus on your PAYE salary that you pay yourself from your payroll scheme and dividend income. In this instance, you’ll need your payslips and dividend certificates as evidence. There are only a couple of lenders out there that lend based on your balance sheet and retained earnings. So, if you are leaving money back in your company, then you may want to search for a lender who takes retained earnings into account. In this case, you’ll also need to present your Limited Company accounts.
6. How to Improve Your Chances of Getting a Mortgage if You’re Self-Employed
Whilst getting a mortgage if you’re self-employed is totally do-able, there are some things you can do to make yourself more ‘attractive’ to lenders. Here are a few ideas for you:
6.1 Pull Your Credit Report
Going self-employed doesn’t affect your credit rating. This is because it doesn’t actually show up on your credit file. But, when you are self-employed, you are personally responsible for all the liabilities of your business (even if they are made out to your business). That means if you default on a payment, or worse, get a County Court Judgment (CCJ), it forms part of your personal credit rating. It doesn’t matter if it was in the line of business, it still shows against your personal name and shows on your credit file.
Your credit report holds information about your credit history. It also shows how you have handled credit such as loans, car finance and even your mobile phone in the past. Mortgage lenders will use this to assess the level of risk associated with lending you money.
Before you start the mortgage process, it’s worthwhile taking a look at your credit score and checking whether there is anything showing on there that can affect your application. An example of this is not being on the electoral roll. There are many free credit reports that you can download. However, these are not necessarily the ones that a lender may use. In fact, the ones that banks use are much more detailed. For this reason, I have always used Check My File which was recommended to me by a mortgage broker since this gives a really detailed credit report. It’s also close to what the banks are using.
6.2 Maximise Your Earnings
As part of preparing for a self-employed mortgage, maximise your earnings when you fill in your tax return because this will increase the amount you can borrow. Think carefully about expenses you are showing as part of your taxes but make sure you are honest. Showing too little expenses to artificially increase your business profits would be considered fraud and could leave you struggling to make your mortgage repayments in the future.
6.3 Use an Accountant
Even if your self-employed taxes are pretty simple and you can DIY your returns. Having your self-assessment tax returns completed and filed by a qualified accountant can give lenders comfort that someone independent has checked your returns and that the figures are accurate.
6.4 Use a Mortgage Broker
A mortgage broker is an expert who will guide you through the mortgage process. They advise you on the best mortgages available to you and which ones are most suitable for your personal situation given what’s happening in the economy. So if your finances are not straight-forward or you have a problem with your credit score, have a chat with a broker who can help you find the right lender for you. They also have links to banks and often can have access to better deals than the ones that you find online.
6.5 Pay Your Tax Bill
Amongst all the many checks a mortgage lender will carry out, you may find that some lenders will want to confirm that you have paid your tax bill. Lenders will check this by asking you to download your tax overview from your online HMRC account. Having unpaid taxes will affect your chances of getting a mortgage because it casts some doubt on your earnings so make sure you have paid your tax in full before applying.
6.6 Deposit Size
The larger your deposit, the less you need to borrow. This reduces the perceived risk the lender is taking so improves your chances of successfully getting a self-employed mortgage. Typically, lenders want you to put down 10% of the property value. However, there are 5% deposit self-employed mortgage options coming onto the market. Again, a mortgage advisor can help you find the right mortgage depending on your deposit.
6.7 Have Two Years Accounts Ready, At Least
Depending on the lender, you will typically need to produce at least 2 years worth of accounts. It’s good to know that the more years you can produce, the better chance you have of successfully applying for a mortgage. By showing a number of years of consistent earning, the lender will consider you more able to repay your mortgage.
6.8 Get Your Personal Finances In Order
Aside from getting your business finances in order, getting your personal finances in order will also help maximise your chances of getting a self-employed mortgage. If you have things like personal loans, overdrafts or credit card balances, these will affect your borrowing power. Or, they may even ruin any chances of success when applying for your mortgage. So, consider paying these off before you apply for your mortgage. Standing orders and direct debits will all be taken into account when calculating how much you can borrow and even your tendencies to hit buy on things like Amazon, Deliveroo and Uber. Therefore, take a look at what you are paying for and consider cancelling your commitments, even temporarily, while you are going through the mortgage process.
Car finance represents a financial commitment that needs to be paid in addition to your mortgage. In this instance, it can affect your ability to repay your lender. If you are in the market for a new car then consider waiting until after you have completed your mortgage application process.
6.9 Start Talking to Banks and Brokers
Even if you aren’t planning to apply for your mortgage in the near future, there’s no harm in talking to banks and brokers to start to get a feel for what you would be eligible for.
7. Can You Get a Mortgage With One Year Accounts?
It’s definitely possible to get a mortgage with one-year trading accounts for your business, but there are only a few lenders that will consider it because they won’t have a full picture of your income so you’ll be viewed as a risk. For that reason, if you do find a lender, they may require a larger deposit and apply a higher rate of interest to your mortgage deal.