Getting a mortgage when self-employed can seem confusing. This is completely understandable, as mortgage applications for employed borrowers are straightforward in comparison.
There’s a lot of misunderstanding in regards to the self-employed applying for a mortgage. That said, the same mortgages are available to borrowers, irrespective of how they’re employed. The only difference is the way mortgage applications are assessed.
How can I get a mortgage if I’m self-employed?
Proving your income is your biggest asset when you’re applying for a mortgage when self-employed. This is because your income shows lenders that you earn enough to repay your mortgage.
To get a mortgage while you’re self-employed, you’ll need the following:
Most mortgage lenders will request at least 2 years' accounts. That said, mortgage approval is possible with accounts for just 1 year.
Your accounts will also need to be certified by a qualified accountant. This is so lenders can verify the authenticity of the accounts, as well as the figures displayed.
Having three years or more of accounts will certainly strengthen your mortgage application. This is especially true if your profits have increased over the years.
If you don't have official company accounts, you may have tax year overviews instead. If you use the HMRC self-assessment service, lenders will require your SA302 documents.
An SA302 is a self-assessment that is summarised by the HMRC in the form of a document. The document shows your income for the year, along with the tax you paid.
Showing a lender that you have had a regular income through being self-employed will help your application.
If you have a documented pipeline of future work, then lenders are able to see that your income is likely to continue. This isn't always necessary and is more suited to contractors.
Read more: How to get a mortgage as a contractor
If you're a company director, showing evidence of retained profits in your business can certainly help your application. Furthermore, showing bank statements in receipt of dividends also shows lenders the level of income you're earning.
Many directors leave large amounts of capital in their business, which lenders understand. Using retained profits in your business can be very useful when you want to borrow a larger than average mortgage.
If you have any other income streams, make sure to include them on your mortgage application. For instance, buy to let investments can help you to meet the affordability of a mortgage.
Lenders may request the tenancy agreement for each buy to let you have. This is so they're able to assess the extra income you're receiving in addition to your self-employed income.
Any income that you're projected to earn (whether through work or investments) will always help to boost your affordability.
Other income streams can include trusts, overseas income, bursaries, state pensions and more. The right broker is always able to show your full income. This is because income is an important factor in getting a mortgage when self-employed.
Having a sizeable deposit and good credit history will always help your application. This isn't necessary just because you're self-employed but it can heavily influence a lender.
Always make sure you have correct and up to date documents. Being prepared will save you time which can be crucial in buying the property you want.
Will mortgage lenders class me as self-employed?
If you own more than 20% of a business from which you earn your main income, then most lenders will view you as self-employed. Furthermore, your business structure will be taken into consideration by lenders.
Business structures usually fall into one of three categories, such as:
- Limited companies
- Sole traders
Director of a limited company
If you have a limited company, your business and personal matters are generally kept separate. The structure of individuals in the company will typically be that of directors and company secretaries.
In terms of applying for a self-employed mortgage, lenders may look at your income in the form of a director’s salary or a dividend (or both). This depends on how you take income from your business.
Lenders may also assess your company’s net profit but this is usually quite rare. This is typically done if there’s a lot of finance left in the business or if there’s been an unusually large business expense.
Learn more: How to get a mortgage as a company director
Important: This is not the same as having a limited company created solely for a buy to let portfolio. If you’re a portfolio landlord with a limited company, please read our article on how to apply for a mortgage with a limited company.
Does a sole trader need a self-employed mortgage?
Being a sole trader is perhaps the most simple of business structures. Generally, a one-person business enables accounts to be kept quite simple, as all profits are retained by the sole trader.
Ensure you have your profits in the form of accounts and your SA302 documents to hand. This will certainly demonstrate your income to lenders.
Applying as a business partner
If you’re in a partnership with someone else, the profits are usually shared. This is divided on how your company shares are divided.
It’s important to show your lender what your exact share is, so your annual income is clearly visible in your application.
If you’re part of an LLP, you can read more about limited liability partnership mortgages here.
Self-employed mortgage rates
Self-employed applicants have access to the exact same mortgage rates as employed applicants. There are no special rates for the employed or self-employed.
The only time you may have to pay higher rates than average is if you were using a small deposit or had bad credit. Higher rates are then charged to compensate for the risk attached to the mortgage. Nonetheless, simply being self-employed won’t result in you paying different mortgage rates to other borrowers.
How much can I borrow if I’m self-employed?
The majority of lenders will assess the affordability of a mortgage based on your net income or net profit. The way lenders calculate this figure varies.
Some lenders will base the affordability on your most recently declared income. Other lenders will calculate your affordability on an average of the past two or three years’ accounts.
What you need to remember is each lender has different criteria to calculate income. It becomes more complex with limited companies, as directors may take a small salary and choose to retain a larger profit within the business.
Self-employed mortgages without proof of income
If you have no proof of income, there are certain lenders that may offer you a secured loan. It’s always up to the lender to lend responsibly and they will, as long as they’re satisfied you’re able to repay your mortgage.
If you’re struggling to prove your income, speak to an advisor. We’ll then provide you with the best options for getting a mortgage. You may have accounted for just 1 year or have not yet filed accounts. Nonetheless, we work with lenders whose criteria is best suited.
Can I use the Help to Buy scheme if I’m self-employed?
If you’re self-employed and have at least three years’ accounts, then you’re likely to be approved a mortgage under the Help to Buy scheme. With three years’ accounts, you’ll have a lot of flexibility in terms of the mortgages you’ll qualify for.
If you have two years’ accounts or less, then it does become more difficult under the Help to Buy scheme. Nonetheless, it’s still possible but it’s highly recommended you seek expert mortgage advice. If you haven’t yet filed your first-year accounts, then in all honesty you will find it very difficult to get a mortgage.
If you’re close to finalising your first tax year, our advisors can liaise with your accountant to establish what you’ll need to declare to get the mortgage you need. Your advisor can then communicate this information to lenders that may approve a mortgage based on this information.
How to find mortgages for the self-employed
It’s important to speak to an advisor who has experience with mortgages for the self-employed. Your application will require a lot of planning because your income is likely to be different each year.
We’ll examine each situation carefully before exploring which lender to place your application with. Advisors can work with more flexible lenders to maximise the chances of getting your mortgage approved.
Saving for a bigger deposit can also help you to unlock the best mortgage deals. Being self-employed doesn’t put you at a disadvantage but a lack of preparation certainly can.
Self-employed mortgage FAQ
If you're self-employed, getting a mortgage can be challenging. This is because your income may not be as straightforward when compared to employed applicants.
This is why self-employed applicants need a well-prepared application.
It's possible to get a mortgage with accounts for just one year. That being said, there are only a handful of lenders that may consider this.
Having two or three years of accounts will improve your chances of getting a mortgage quite considerably.
There shouldn't be any issues applying for a joint mortgage with one self-employed applicant.
Lenders will be more concerned about any joint income earned, rather than the employment status of the applicants. It's also possible for two-self-employed applicants to get a joint mortgage.
If you're self-employed and have bad credit, mortgage approval will be difficult but it's still possible.
Lenders will assess the nature of your credit issues, along with the stability of your income. They'll then make a more informed decision of whether a mortgage is likely.