Self-employed mortgages: Easy or hard?
Although the term ‘self-employed mortgages’ is used a lot, they don’t actually exist. You’re considered to be self-employed if you own at least 20-25% of a business that provides your primary income. But the mortgage product you apply for will be the same regardless of whether an employer pays your wages or come from an enterprise you own. However, getting a mortgage when you are self-employed is more difficult as there are extra hoops to jump through. In this article, we look at why it’s harder to get ‘self-employed mortgages,’ the documentation you’ll need and what you can do to improve the chances of having your application accepted by a lender.
Why is it so difficult to get a mortgage if you’re self-employed?
The rule of thumb is that mortgage lenders like their borrowers to have a regular and reliable income stream. If you’re self-employed, this consistency can be more difficult to prove, especially if your work has experienced quieter periods or you haven’t worked for yourself for very long. You may also find that the mortgage lender you’ve approached has reservations about whether you’re able to afford the monthly repayments, particularly in the event of interest rates increasing further down the line.
Do I need to be self-employed for a set amount of time to be able to get a mortgage?
As much as getting a mortgage is more difficult if you’re self-employed, it’s not impossible. Around 12% of the country’s workforce are classed as self-employed, and many of these will have had mortgage applications accepted, providing they’ve met the lender’s criteria. This will involve submitting 2-3 years’ worth of trading accounts, which the mortgage lender will use to take an average net profit and calculate how much they’re willing to lend you. So, if you’ve recently started out as a sole trader or contractor, or you are the director of a new company, it’s unlikely that you’ll be considered for a mortgage. But if you’ve been self-employed for a couple of years and you have a regular income, lenders will perceive you as a less risky investment.
What other documentation will I need to provide if I’m applying for a mortgage and I’m self-employed?
As well as providing accounts, mortgage lenders will want to see 3-6 months’ worth of bank statements so they can see your incomings and outgoings. Because you won’t have a wage slip to certify your monthly earnings, you’ll be asked detailed questions about your finances, such as any loan repayments you have, credit cards, household bills and childcare. You’ll therefore need to provide evidentiary support in the form of:
• Tax year overviews or SA302 forms for the past two or three years. An accountant can provide this for you.
• Evidence of upcoming work if you’re a contractor or company director.
• ID in the form of a passport or driving licence to prove your name and address.
• Copies of utility and council tax bills.
What will make it easier to be accepted for ‘self-employed mortgages?’
If you generate your own income, lenders will expect you to meet stricter affordability criteria, which mortgage brokers can help you with. To improve the chances of your application being accepted, it’s worth having your accounts prepared by a chartered accountant who can verify your reliability. Having a good credit history is also essential, so check your credit report and prioritise making any necessary improvements. It’s also worth trying to save as much as you can for a deposit if you can afford to do so, as this will enable you to borrow more and give you access to better mortgage rates as a self-employed worker.
Who can help me get a mortgage if I’m self-employed?
Whether you’re a first-time buyer or want some advice on improving your credit report, mortgage brokers can offer advice and make the process easier. Because they have access to both high-street and specialist lenders, they will know the best ones to approach and which will be most likely to respond favourably to your employment status. Applying for a mortgage with the wrong sort of lender can impact your future success because it will appear as a ‘hard search’ on your credit report. Too many of these are enough to cause lenders to raise their eyebrows, and extra hurdles are something that self-employed mortgage applicants don’t need.
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