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When you work for yourself, it’s quite common for your income to be erratic. Whilst cash flow might be something that you learn to live with, it can be a problem when you come to buy a house, especially in the first few years of starting. Mainstream lenders typically offer mortgages on concrete figures, like a PAYE salary and if you’re self employed, at least 3 solid years of accounts.
If you don’t have that yet and aren’t employed by anyone but yourself, rightly or wrongly, high street mortgage companies will generally not be able to offer you anything. That’s where we come in. We can match you to a Mortgage Advisor who will have access to the whole market and lenders who only require a minimum of 1 year self assessment.
‘Embarrassing.’ ‘Humiliating.’ ‘I’m a failure.’
Just a few of the comments made by some of the over 40% of UK individuals whose application for a mortgage gets declined. But is the inability to secure the funds to purchase a property down to these individuals, or is it down to the out-dated and inaccurate advice they’ve been given?
The mortgage research that revealed the fact that those people who were refused mortgages feel ashamed, also concluded that many Brits don’t even bother looking into getting on the property ladder because they believe they’ll be refused.
35% believe they’ll be refused a mortgage because they don’t earn enough
33% find the whole mortgage process too much hassle
However, many of the people who are self-ruling themselves out of getting mortgages are basing their decision on outdated facts and information. Among those not bothering to look into getting a mortgage are many of the close to 5 million self-employed individuals in the UK.
A great swathe of these entrepreneurs mistakenly believe that there’s little point them even thinking about a mortgage, let alone approaching a lender. Their irregular income. Their inability to produce at least 3 years’ worth of accounts. Just a couple of reasons that are leading the self-employed to steer clear of getting a mortgage.
But do they have good reason for taking such a cynical view of mortgages? Research would seem to say ‘yes’, revealing almost half of mortgage applications are being rejected for reasons including self-employment .
Yet this negativity is not borne out by our research here at Niche Mortgage Info, which reveals that the vast majority of mortgage applications made by the self-employed are being accepted.
Keep reading this article to discover:
Your ability to pay back the mortgage you’re applying for will definitely be a consideration for whoever you approach to lend you the money. But cold hard cash is by no means the be-all and end-all. There are other factors at play, and as a self-employed person looking for a mortgage in the UK, there are steps you can take to improve your chances of getting accepted for a self-employed mortgage:
CONTACT A MORTGAGE BROKER
The criteria lenders work to varies, and a broker can put you in touch with someone who could meet your needs. Here at Niche Mortgage Info, we can match you to suitable brokers.
HAVE A DEPOSIT READY AND WAITING
It will show lenders that you are prepared for your mortgage.
ENSURE ALL NECESSARY DOCUMENTS ARE READY
Again, being organised saves time and hassle (see which documents you need later in this article)
DON’T START VIEWING WITHOUT AN AGREEMENT IN PRINCIPLE Viewing properties you can’t afford is not only a bit depressing, it’s also a waste of time. Most estate agents will require evidence that you can get the loan you need to cover paying for the properties you’re viewing, so be sure to get such an agreement from a lender before house hunting.
BE ON THE ELECTORAL ROLL
This will help your credit score. To see if you are on the electoral roll, contact your local council.
LOOK AT YOUR CREDIT FILE
Any bad entries on it could count against you.
SEEK ADVICE FROM YOUR ACCOUNTANT IF USING BUSINESS FUNDS TO PAY YOUR DEPOSIT / MORTGAGE
You’re better off making smaller, regular withdrawals from your business account rather than a big lump sum.
KEEP YOUR ACCOUNTS UP-TO-DATE
The better your credit record, the more competitive the mortgage rate you’ll be offered, so be sure to settle debts in good time, and consider setting up as many direct debits as you can.
DON’T DO TOO MANY CREDIT CHECKS
Applying for insurance or credit cards can mean lots of credit checks happening, and these combine to reduce your credit score. Insurance comparison sites are to be avoided, as they will carry out multiple checks.
AVOID PAYDAY LOANS
Using these sorts of sites suggests that your finances are in a less than rosy state. If your credit record shows evidence of payday loans, you’re likely to get refused a mortgage.
GO EASY ON THE CREDIT CARD/S
The more debt you rack up on your credit card, the lower your credit score will be. If one of your cards is teetering on its limit, consider spreading the balance over two credit cards instead. And when repaying the credit card debt, don’t just pay the minimum amount every month, as lenders see this as evidence that you’re experiencing financial difficulties.
Most lenders will want you to pay off at least 5% of the total price of the property you’re buying in advance as a deposit. This is the same for people in ‘regular’ employment. So if you’ve got your heart set on a £250,000 mid-terrace house, you’re going to need at least £12,500 by way of a deposit. That sum is subtracted from the cost of the house, leaving you with an amount your lender will give you as a mortgage.
Need When Applying For A Mortgage
A driving license is ideal as long as it shows your current address.
PROOF OF ADDRESS
A household utility bill is good enough, and it should be a bill that has been posted to you, not an online statement you have printed out.
PAYSLIPS FROM THE LAST 3 TO 6 MONTHS AND P60s
If you’ve only recently become self-employed, you may be able to use payslips from your previous employer. If you work on commission or earn bonuses, your lender might want to see P60s from the last couple of financial years. If you are in a CIS or Umbrella arrangement, you’ll need to provide 6 months’ worth of payslips.
These should be from the last 3 months. These can be posted or downloaded. You should have to-hand your current account statements and business account statements.
PROOF OF FUNDS FOR A DEPOSIT
You’ll need a statement that shows you have the funds available or, if they are being donated as a gift from a family member, they’ll need a letter confirming they have the funds and are transferring them to you.
EVIDENCE OF OTHER INCOME SOURCES
If you own Buy-To-Let property, a tenant agreement and 3 months’ worth of bank statements showing evidence of incoming rent will be required.
LIFE INSURANCE POLICY SUMMARY
Lenders are always reassured when you have life insurance that’ll cover the mortgage in case the worst happens, so make sure you have your policy summary to-hand.
YOUR LTD COMPANY ACCOUNTS
You’ll need 2 years’ worth of accounts, and the latest shouldn’t be older than 18 months.
YOUR TAX RETURNS
You’ll need to reach out to HMRC for at least 1 year’s or maybe up to 3 years’ worth of SA302s as well as a tax overview. Specific requirements depend on the lender.
YOUR SIGNED CONTRACTS
If you’re a contractor, lenders will need to see the last 12 months’ worth of contracts, including how much you were paid. Rolling contracts are acceptable too.
Depending on how you are self-employed, there are other requirements you will need to supply your lender:
SOLE TRADERS – 1 year’s finalised accounts OR an SA302 from HMRC that’s less than 18 months old.
LTD COMPANY FREELANCERS & CONTRACTORS – you’ll need to supply your current contract, or personal tax returns / company accounts
LTD COMPANY DIRECTOR – your latest company accounts or a personal tax return.
Let’s deal with earnings first, as the way these are calculated depends on how you are self-employed:
FREELANCER OR SOLE TRADER – lenders will focus on the net profit your business is generating.
LIMITED COMPANY – a lender will be interested in your salary and the dividends you’ve been paid, or the share of net profits you’ve taken
CONTRACTORS – lenders will consider your annualised day rate
Calculating How Much You Can Afford To Borrow
Lenders will take into consideration all kinds of factors when working out how much they think you can afford to borrow. This will include your lifestyle, other financial commitments you have and how many people are financially dependent on you. Here at Niche, we always recommend you speak to a mortgage expert first, but to give yourself a ballpark figure of how much you can afford to borrow, try the Niche Mortgage Qualifier.
applying for a self-employed mortgage
LACK OF ACCOUNTS
If you can only provide 1 years’ worth of accounts, some lenders will walk away, as their criteria requires you to supply 2 or 3 years’ worth of accounts. But this is not a reason to stop applying for a mortgage, as there are lenders out there who can accept just 1 year’s worth.
Changes in your income level can cause problems. To calculate what you can afford to pay, lenders are likely to calculate your average income over the past 2 or 3 years.
You’ll no doubt have plenty of questions to ask about getting a mortgage as a self-employed person. We’ll try and answer as many of them as we can below, but please be aware that all details provided below is only supplied for informational purposes. Should you require more assistance, please reach out to the Niche Mortgage Info team here.
How do the interest rates that lenders offer the self-employed compare to those they offer people in ‘regular’ employment?
Again, contrary to popular belief, lenders will offer the same interest rates on mortgages to self-employed people as they do to people in ‘regular’ employment.
If you become self-employed after taking out a mortgage, can you expect an interest rate rise due to this change of status when your mortgage needs renewing?
It’s highly unlikely that any lender will penalise you for becoming a contractor. But when the time comes to renew your mortgage, it’s always worth looking around different lenders to see if you can get a better deal than your current mortgage provider is offering.
Can a self-employed person work on an overseas contract when they have a UK mortgage?
There are lenders who will consider helping in this scenario, but it’s vital that the income you are paid as a result of your contract is in sterling.
What if a self-employed person has only been working on and off for the past few years? How will this affect their chances of landing a mortgage?
Before looking for a mortgage, you’ll need to have been self-employed for a continuous period of at least 12 months.
If two people who are both directors of a limited company and have 50/50 share of the business apply for a joint mortgage, but one of the directors only has 6 months’ experience, how will that affect getting a mortgage?
Unfortunately, having just 6 month’s experience as a self-employed person will not be enough for lenders. Typically, they need to see between 1 and 3 years’ income before they will lend. The only way it might work is if the people involved worked on a contract basis and the application was made jointly. Should both people applying for a mortgage have the required experience, it’s always advisable to apply for a mortgage together, especially if they are married.
If a spouse has a 50% share of a limited company, making them eligible for dividends, will this affect the other spouse’s search for a mortgage?
There should be no affect in terms of how much you can borrow, as long as you apply jointly. This will enable your affordability rate to be calculated using 100% of the salary and dividends you draw between you.
When asked for income details, what should freelancers with limited companies tell their mortgage provider?
Most lenders will want to know your salary and the dividends you draw from the company in order to work out your income. Other lenders might want to know your share of profit plus salary. If you’re self-employed as a contract worker, they will use your day rate to calculate your income.
If a freelancer runs a limited company based on one major client rather than several, does that make a difference?
The short answer is no. It really doesn’t matter to lenders how many clients you are working for, just how much income you are generating.
What percentage deposit should I look to pay on my self-employed mortgage?
The bigger your deposit, the more lenders you are likely to be able to choose between and, generally speaking, the better interest rate you will get. 5% is the absolute minimum lenders will accept as a deposit, but if you can afford anything above that, you should pay it.
Can a self-employed person move house and get another mortgage?
It is possible to get a mortgage if you have 1 year’s finalised company accounts or a personalised tax return.
What happens to someone who was in a permanent role when they first got their mortgage, but is self-employed at the time their mortgage discount period ends?
If it is just a case of you getting a new rate as a result of your mortgage discount period ending, then it’s simply a case of your mortgage provider switching your rate.
Do self-employed people need an accountant in order to get a mortgage?
Having an accountant is not necessary, as long as you can provide evidence of your earnings through completed self-assessment forms and you can provide SA302s and tax overviews. Contractors usually just need a current contract as evidence of their current income.
Will lenders take into account full-time and freelance income for applicants who do both types of work?
Lenders are looking for evidence that the hours anyone works are sustainable, and not just being carried out to gain a mortgage. As a result, a year’s worth of Self Assessment tax forms will be required to prove the level of income.
What happens if a self-employed person’s income drops dramatically during the tax year in which they apply for a mortgage?
In these circumstances, lenders will use the last available year’s accounts/tax returns, as long as they are less than 18 months old.
If a mortgage applicant is just about to start contracting when they apply for a mortgage and has plenty of experience in that industry, what are the chances of them getting a mortgage?
The answer is there shouldn’t be much of a problem, but it will be dependent on the lender and the value of the annual contract they will accept or the minimum day rate that meets their criteria.
Is there a minimum income that’s required to be earned in order to get a mortgage?
There is no official minimum amount, but lenders will tend to offer very low loan amounts to those earning less than £10k per year, because most of that income is deemed to be required to cover the cost of living, and therefore not available for the repayment of a mortgage.
Can self-employed people in negative equity switch mortgage providers in order to get a better rate?
While it’s not possible to switch mortgage providers, it is possible to switch rates with your current lender, so it’s worth discussing the matter with them. It’s also worth getting your property re-valued as it’s likely to have changed since you got your mortgage.
Should you wish to seek a mortgage as a self-employed person, here at Niche Mortgage Info, we can help by matching you with the perfect broker to find the best mortgage deal for you – fast, easily and for free. Get started here >
You’re going to be classed as self employed if:
Like we said earlier, if you’ve become self employed in the last 12-18 months, the traditional route of applying to a mainstream lender could prove tricky, as they work to a set of immutable criteria. The best route for someone in this position is to talk to one of the growing number of specialist mortgage brokers whose USP is that they have access to deals that you won’t find on the high street.
The deals we speak of are most certainly competitive in the marketplace, but the overriding benefit of these mortgages is that they have a broad criteria of acceptance and are suited to recently self employed people who can prove their income.
Unfortunately not. Since 2011, the Financial Conduct Authority have outlawed self cert mortgages, where the self employed were not required to prove their income.
In order to give yourself the best possible chance of success, you’re going to need to have the following as a minimum:
*Only applicable if your business operates as a limited company.
At Niche Mortgage Info, we work with a group of carefully selected niche mortgage brokers, who have access to lenders that are prepared to take your entire financial picture into account and not automatically dismiss your application simply because you don’t meet all of their rigid criteria.
These niche lenders are also able to take other factors like being a Company Shareholder or Company Director into account, giving them their full weight of importance to the affordability of your mortgage.
If you’re in this position and you’d like more information on the subject, why not try our 60 Second Qualify today and let us introduce you to a broker who will truly understand your circumstances and help find you the best mortgage deal possible.