One of the downsides of having your own business is that applying for a mortgage can seem a more challenging process than if you were employed.
The following guidance looks at the key criteria for getting a self employed mortgage, including which documentation you will need to show to potential lenders and the steps you can take to improve your chances of owning your own home.
Self-employed mortgage rules
Many self employed people mistakenly assume that either they don’t earn enough money for a mortgage or they won’t be eligible because they don’t take a set wage. This is often not the case. There are, of course, affordability criteria that must be met to be approved for a mortgage, but working for yourself is not, of itself, a bar to borrowing money to buy a home.
The key criteria for mortgage lending can vary as between banks and other financial lenders. Very often, the requirements for self employed mortgage applicants can be stricter than for those receiving a regular pay packet under a permanent contract of employment. This is because lending large sums of money to the self employed is perceived as riskier than lending to those in paid employment — largely because trading income is expected to, or can easily, fluctuate. Still, if you can prove a reliable income over a set period of time, sufficient to meet any monthly mortgage repayments, you’ll be over the first hurdle.
Most lenders will usually ask to see evidence of at least two years’ self employed income. This means you’ll need to show at least two years’ worth of certified accounts or HMRC self assessment returns. There may also be some lenders who ask to see a prediction of your future clients or contracts to ensure that you can afford the repayments moving forward.
However, even though you may be required to jump through more hoops to prove your income than someone who is on an employer’s payroll, if you can provide clear evidence of your income over the past two to three years, and that evidence suggests you will be profitable moving forward, you will be potentially eligible for a mortgage.
There are other criteria that will still need to be met, in the same way as any other borrower, including passing the lender’s affordability test and a credit reference check. Still, in theory, subject to providing proof of income, you should have access to the same range of mortgages as everybody else.
How is a self employed mortgage calculated?
The amount of borrowing and the way a self employed mortgage is calculated will depend on both your legal status and the lender. For example, for sole traders and partners, lenders will typically look at net profits, whilst for directors of a limited company they can look at both salary and dividends.
However, some lenders set the amount you can borrow based on your average profits over the past few years, whereas others will calculate your income based on only your previous year of trading. Being self employed can make it tricky for lenders to assess your regular income, especially if you’ve had quiet periods where profits have been down.
It may be the case that some lenders will be prepared to make a higher mortgage offer than others, depending on how they approach your self employed earnings, so you may need to shop around. However, having determined your income within any relevant timeframe, all lenders will then go on to consider affordability, having regard to your income and outgoings on a monthly basis. Lenders will look at all sorts of factors when deciding whether or not to give you a loan, including existing financial commitments, lifestyle spending and dependants. If your outgoings are high, including things like loans, credits cards or vehicle finance repayments, provided you still have some disposable income this will not necessarily be a bar to lending, but it will affect the amount of mortgage that will be approved.
The lender will also look at the loan to value of the property (LTV). The LTV measures the relationship between the loan amount and the market value of the property against which the loan will be secured. So if, for example, a lender offers a mortgage deal that has a maximum 75% LTV, this means they will only lend you up to 75% of the property value, leaving you with the prospect of raising a 25% deposit. In any event, in most cases, lenders will expect you to have a deposit saved of at least 5 to 10% of the property value for lending to be considered.
What documents will you need to show for a self employed mortgage?
When applying for a self employed mortgage, you must be able to verify your trading income. In the past, the self employed were able to apply for what was known as a self-certification mortgage, with no requirement to prove their income. However, self-certification mortgages were banned by the Financial Conduct Authority several years ago due to concerns that borrowers were being accepted for mortgages that they couldn’t afford.
When applying for a mortgage for self employed people, typically you will need:
- At least two years’ certified accounts from a qualified chartered accountant
- SA302 tax calculation or a tax year overview from HMRC for the past two to three years
- Evidence of upcoming contracts if you’re a contractor
- Evidence of dividend payments or retained profits if you’re a company director.
You may not need to provide all of this evidence, it will very much depend on the lender. If you do your own accounts, the lender may be satisfied with seeing your SA302 forms and tax overview from HMRC, rather than insisting on certified accounts from an accountant.
In addition to providing evidence of your income, you’ll need to provide photographic ID, such as your passport or driving licence, three months’ worth of council tax or utility bills as proof of your current address, as well as six months’ worth of bank statements. Lenders will want to examine your bank statements to look at how much you spend on bills and other regular outgoings to be certain you can afford your mortgage repayments. You’ll also need to provide documentary evidence of funds held for your deposit.
Common pitfalls when applying for a self employed morgage
There are various pitfalls when applying for a self employed mortgage. Below we look at the most common problems encountered by applicants:
Most lenders will require at least two or three years’ worth of accounts. However, if you’ve not been trading for very long, you may only have one year’s accounts or a single SA302 or tax overview from HMRC. However, there are some lenders who will be prepared to accept a single years’ worth of accounts, provided you can also provide a positive projection of your profits for the upcoming year. Finding a specialist lender to consider lending to the newly self employed can be a challenge, but it’s not entirely impossible, especially if you have proof of future contracts or commissions.
Lenders will often average out your income over an applicable timeframe, typically two to three years. This means that uneven income, with a series of quiet periods, may impact their decision to lend or, at the very least, affect the amount of lending. However, if you can still show an increase in profits over the past couple of years, this will maximise your chances of a successful outcome. If your income tends to vary from year to year, you might need to show proof of your future income potential.
Poor credit history
Credit checks will be required for all mortgage applicants, where lenders will want to ensure they are lending to someone with a reliable history of meeting repayments. If you have a poor credit rating this does not mean you’ll necessarily be refused a mortgage, but you may need to shop around for a specialist lender. However, if you struggle to get accepted by a mainstream lender, you may end up paying a higher rate of interest to reflect the risk involved in lending to someone with a poor credit history.
Lack of affordability
Lenders will require all applicants to undergo an affordability test. This is to make sure you’re able to afford any mortgage repayments based on your current income and outgoings. If you have a number of other financial commitments, this will limit the amount you will be deemed to be able to afford. This means you may need to cut back on your spending or pay off some of your debts before you can apply for a mortgage.
Lack of a sufficient deposit
The amount of deposit you’ll need will depend on the maximum amount that the lender will consider loaning to you as a percentage of the value of the property, ie; the loan to value ratio (LTV). If you cannot raise the deposit required, you may be able to find a lender who will lend you money at a higher LTV ratio, although the smaller the deposit the higher the interest rates are likely to be.
What can I do to improve my chances of getting a self employed mortgage?
On paper, it may seem like the prospects of being approved for a self employed mortgage are minimal. However, there are a number of steps you can take to improve your chances of a successful outcome. Below we provide some useful advice on what you can do to help:
Check your credit rating
You can check your credit history online through the three credit reference agencies: Experian, Equifax or TransUnion. You can also access the information held by these agencies for free through MSE Credit Club, Clearscore or Credit Karma. In this way you can see how your credit score is rated and even try to boost your rating by applying to correct any mistakes or applying to be put on the electoral roll.
Ensure your paperwork and business accounts are in order
By having up-to-date accounts and self assessment returns, this will enable you to prove your income to potential lenders and show that you’re a reliable investment. You can also print off an SA302 form to provide a summary of your tax calculations for each year of trading. How long you have been trading is a key consideration for lenders, so you’ll have a better chance if you can wait until you’re able to provide at least two years’ worth of accounts or self assessment returns.
Keep your monthly outgoings low
There are certain outgoings that are unavoidable, such as rent, council tax and utility bills. You may also have loans and credit cards that you are currently paying off. However, by minimising all other expenditure, such as on monthly subscriptions or hobbies, this will help to satisfy any affordability test. This will also help you to save for a healthy deposit where, the higher the deposit, the lower the interest rates are likely to be on any lending.
Speak to a specialist broker
A broker who specialises in self employed mortgages will be able to give you expert advice on what lenders may be willing to consider your application, for example, if your credit score is low or if you only have one years’ worth of accounts. Your choice of lenders may be more limited if you’re self employed, but it doesn’t mean you can’t get a mortgage at all. A specialist broker can also provide advice on which lenders provide the least stringent criteria and the most competitive interest rates for the self employed.
Self employed mortgage FAQs
How many years do you have to be self-employed to get a mortgage?
The number of years that you need to be self employed before being accepted for a mortgage can vary between lenders, but typically you will need evidence of self employed income over a period of two to three years.
Is it hard to get a mortgage self-employed?
A mortgage for self employed applicants can be harder to obtain because generally more proof of income is required than for applicants in paid employment. However, provided you can produce at least two years’ accounts, you will be potentially eligible.
Can you get a mortgage loan if you are self-employed?
It’s possible to get a mortgage loan if you’re self employed, although you’ll need to provide proof of a reliable trading income over a set period of time, typically 2-3 years, sufficient to cover your monthly repayments.
Can I get a mortgage with 1 year self employment?
You’ll usually need at least 2 years self employment to be approved for a mortgage, but there are specialist lenders that may consider 1 years’ income, provide you can also provide a projection of your profits for the upcoming year.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.