How to get a mortgage when you’re self-employed
by Proportunity & Romit Patel, Associate Director at LDNfinance
Whether you’re a builder, contractor, freelancer, sole trader, or a company director, if you’re self-employed, here’s what you need to know about getting a mortgage. There may be a few extra hoops to jump through, but it’s completely possible. Our guide breaks it down for you.
How do I know if I’m ‘self-employed’?
You fall under the ‘self-employed’ bucket if you own 20-25% of a business and it’s your main source of income. You could be any of the following:
- A sole trader. You work on your own, keep your profits and are the sole-owner of your work and business.
- A freelancer. You’re hired to work for different companies on specific jobs
- An independent business owner. You own and are responsible for the day-to-day running of a business that you own
- An independent contractor. You work for one client, sometimes for months at a time often in the IT/Technology/Project Management sector.
Self-employed vs everybody else
One of the biggest challenges that a self-employed home buyer faces is proving that you have a steady stream of income. Unlike individuals that have an employer to vouch for their employability status, self-employed people are required to provide far more evidence to give mortgage lenders the confidence in your income.
The more you can prove the predictability of your annual income, the better. This is where longer term or recurring contracts come in handy. It’s particularly helpful to show evidence of steady income with few breaks in the last 12-months before you apply.
Mortgage options for self-employed
…are the same as everyone else! If you’re self-employed and looking for a mortgage, you will have access to the same range of mortgages. You’ll need to pass the lender’s affordability tests in the same way as any other borrower. Since the Mortgage Market Review came into place in 2014, mortgage lenders have considerably tightened up their lending criteria to be given confidence that you can afford your mortgage before they agree to lend you the money.
Rates aren’t vastly different either. As long as you’re able to supply concrete evidence of your income, you should be able to qualify for the same mortgage at similar rates as someone with a comparable salary as an employee.
Let’s talk about paperwork
Mortgages for self-employed people are an option for freelancers and contractors working on a gross pay basis. For example, you may be paying yourself with a small salary and then taking dividend payments at the end of your financial year. So long as you can prove your income, your application will be considered.
Whilst it’s more common to apply for a mortgage after you have been working for yourself for more than 2 years, there are lenders who will consider less time depending upon your circumstance and overall application.
To prove your income when you apply for a self-employed mortgage, you will need to provide the following documents:
- At least one year or more years’ certified accounts.
- SA302 forms and a tax year overview (from HMRC)
- Evidence of upcoming contracts (if you’re a contractor or freelancer)
As well as providing evidence of your income, you will also need to provide:
- Driving license
- Council tax bill
- Utility bills dated within three months
- 3 months worth of bank statements
Lenders will want to examine your bank statements to look at how much you spend on bills and other costs to be certain you could afford your mortgage repayments. They may ask about:
- Household bills
- Travel and commuting costs
- Credit card and store card repayments
- Loan repayments
- Car finance agreements
How much can I borrow for a self-employed mortgage?
As a self-employed person, it can be more complex to find out what mortgage loan size is affordable. However, every lender has their own criteria that will impact the income multiples they offer.
On average, you can usually borrow up to 4.5x your annual income but in some instances, however specialist lenders like Proportunity could lend up to 6x your income!
Be prepared and get organised
Applying for mortgage doesn’t need to be a headache. It’s likely you will already have all the paperwork in handy. The truth is, if you keep your self-employed affairs up to date and organised and your business is steadily profitable, you won’t have a problem. Hiring an accountant can be helpful to make sure that you have the best possible chance of building a strong income and credit profile.
You may run into borrowing limitations because of your self employed status. In which case, a secondary mortgage like Proportunity helps top up your existing mortgage so that you could achieve a bigger home buying budget to access the types of properties you’re looking for. As self-employed applicants have a few more documents to gather, a bigger deposit and a strong credit score are particularly important.