We are often approached by self-employed clients who operate as a sole trader, limited company or partnership and are looking to arrange a mortgage or a remortgage either on their main residence or a buy to let property.
They typically tell us they are frustrated as they may have approached their Bank or existing lender only to be declined due to their self-employed status. In several situations, they could be risking losing out on their dream property or just not being able to borrow as much as they require.
We appreciate everyone is unique and their mortgage requirements need to be assessed on a case by case basis. Our self-employed clients typically have several issues that just do not tick the boxes for mainstream lenders who assess cases using a computer to make their lending decisions.
Applying for a mortgage can be tricky, but if you’re a self-employed worker, freelancer or contractor, you could face extra challenges. In the past, self-employed people could get a self-certified mortgage – telling a lender how much they earned without providing any evidence.
But these are no longer available and now all lenders must see proof of income for all applications.If you’re self-employed, you’ll now need up to date proof of income showing exactly how much you earn to apply for a mortgage.
What being self-employed means for your mortgage
Lenders like lending to people they consider to be at low risk of defaulting on their monthly payments. If you’re self-employed, lenders will want to see proof of a steady income over time.
Lenders will usually assess self-employed income in different ways – depending on whether you operate as a sole trader, partnership, or as a limited company.
For a sole trader, lenders will usually look at the net profit of the business. For partnerships, they’ll look at each partner’s share of the profit. If you’re the director of a limited company, lenders typically look at your salary plus dividends. Dividends can make up a major part of your income if you run your own company, so always make sure any lender you’re applying to considers both when working out how much they will lend you.
Things you might need to have to hand:
- Two or sometimes three years’ worth of accounts prepared by an accountant
- SA302 and Tax Year Overviews– the self-assessment form that shows how much income you declared to HMRC and how much tax you paid on that
- Bank statements
- Proof of your deposit
- Details of any debt repayments and other outgoings, including things such as childcare costs, holiday spending, and pension contributions.
Don’t you have two- or three-years’ accounts? Don’t despair.
Certain lenders may still be prepared to offer you a mortgage, particularly if you can prove that your business has plenty of work going forwards, or if you can show you have only recently left full-time employment but will be continuing in the same industry as a contractor.
A mortgage broker will advise which lenders tend to look favourably on self-employed applicants, and which might accept fewer than two years of accounts.
You can improve your chances of being accepted for a mortgage if you have got an excellent credit rating, a decent deposit or a large chunk of equity in your home if remortgaging.
Remember: lenders won’t just run a credit check on you as an individual, they’ll also credit check your business too, so make sure there aren’t any outstanding debts, and check you’re not late with any payments.