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Self-Employed Mortgage Criteria
Self-employed people can successfully apply for a mortgage, just as anyone else can.
However, you need to be sure that you can pay the mortgage back in the long term. If you’re free from existing debts in your personal finances and make enough income through your professional finances, your application may be successful.
When you apply for a mortgage as a self-employed person, the lender will analyse your income and your job type to conclude whether or not you’re fit for the mortgage.
As a self-employed person, you’ll fit into a specific category, such as:
Sole trader
You’re your own boss and you keep all the profits.
When applying for a mortgage, lenders will look at your net profit to calculate whether or not to approve your application.
As a sole trader, you’ll need to provide at least one year’s worth of finalised accounts.
Partnerships
As part of a partnership, you own the company and share its profits with other owners. In this case, a lender will analyse your share of the company’s net profit to determine whether you’re fit for a mortgage.
Contractors and freelancers
If you’re a contractor or a freelancer, lenders will review how much you get paid per contract and the amount of time there is between contracts.
Limited company
In a limited company, the last two years’ worth of your income will be averaged. From this, lenders will be able to determine whether or not to approve your application.
Umbrella services and Construction Industry Scheme (CIS)
Normally, you’ll need to provide at least 12 months’ worth of payslips, which will provide the lender with enough of an overview of your income.
Essential Financial Documents For A Self-Employed Mortgage
As a self-employed mortgage applicant, there are certain documents that you’ll have to present to the mortgage lender for your application to be considered in the first place.
These self-employed essentials include:
- ID – As with all money lending practices, you’ll need to provide the lender with your ID. This ID could either be in the form of your passport or your driving licence. You need to ensure that the licence has your most current address visibly printed on it.
- Proof of address – You’ll also need to provide an official document with your proof of address on it. You could use either your utility bill, council tax, or financial statement. This will likely have to be a physical copy. If all of your documents get sent to you virtually, you’ll need to switch one of them to postal delivery in advance.
- Payslips – If you direct your own limited company or operate as a sole trader, you need to prove how much money you pay yourself. You’ll have to submit at least three months’ worth of payslips to the lender. You may have to provide some P60s too, especially if you receive bonuses and commissions. This will all prove whether your income is steady enough for a mortgage.
- Limited company accounts – If you’re the director of a limited company, you’ll need to provide at least one year of your company accounts. One year’s worth of accounts will normally suffice, although some lenders may ask for two.
- Contractors – You’ll need to submit the last 12 months’ worth of contracts to the lender. These contracts need to provide proof of your day rate, expiry dates, as well as signatures from both parties. If you have upcoming contracts lined up, you should also provide proof of these. All of this will prove to lenders that you have a steady source of income.
- Proof of deposit – You’ll need to provide at least three months’ worth of bank statements to the lender. If these bank statements do not prove the deposit amount you have saved, you’ll need to provide a separate statement that proves the amount of funds you have held.
- Evidence of life insurance – If you have life insurance, a lender will need to see evidence of this. Normally, a copy of the policy summary will suffice.
- Background of buy-to-lets – If you currently own buy-to-let properties and use them as a source of income, you’ll need to provide evidence for this to the lender. As evidence, you’ll need to submit tenancy agreements as well as three months’ worth of bank statements proving that you’re receiving rent from these properties.
How to Build A Strong Self-Employed Mortgage Application
Self-employed mortgages become more feasible after you carry out the following:
Improve your credit score
You need a good credit score to successfully take out a mortgage as a self-employed worker. There are several ways you can improve your score. This includes keeping your credit utilisation low and paying back credit on time.
Additionally, you could check that you’re on the electoral roll – or add yourself to it if you aren’t already. This can improve your credit score as it acts as identity verification and proof of address stability. You can add yourself to the register through your local council or through GOV.UK’s online registration page.
However, try to minimise the number of credit checks that take place. Multiple credit checks in a small space of time can actually worsen your overall credit score. Credit checks are normally made each time you use an insurance comparison website, so try to minimise your usage of them.
Avoid payday loans
Payday loans don’t necessarily worsen your credit score. However, they will still show up on your credit report. If you’ve taken out multiple payday loans recently, this will likely affect the success of your mortgage application. The more recent the payday loans, the less likely lenders will accept your application.
Additionally, a payday loan indicates some degree of financial instability. It may also increase your Debt-to-Income Ratio (DTI).
Collect your SA302 forms
HMRC creates an SA302 form whenever file your tax returns. This form will provide evidence of all your earnings for that year as well as income tax calculations. Mortgage lenders normally request to see at least three SA302 forms from self-employed mortgage applicants.
To ensure the smooth running of your application and increase your chances of it being accepted, having your SA302 forms in order before you apply is recommended.
There are two ways you can collect your SA302 forms. If you do your tax returns online, you can visit your HMRC online account where you’ll be able to find your SA302 forms. Physical copies of these forms can then be printed out. Or, if you normally send your tax returns by post, you can contact HMRC directly and request them to send you physical copies of your SA302 forms.
Save a big deposit
When applying for a mortgage as a self-employed worker, you should start saving towards a deposit early. Having a significant deposit when applying for a mortgage will open up the most amount of mortgage deals for you.
A bigger deposit could improve your loan-to-value ratio as it reduces the amount of money that lenders will have to give you. For this reason, you’ll be seen as a low-risk borrower, which definitely increases your chances of securing the loan.
Plus, with a bigger deposit saved, you’ll have smaller monthly repayments. Lenders may even offer you lower interest rates, which could ensure long-term savings.
Hire an accountant (only if you can afford one)
If you can afford it, you should hire an accountant. A professional will be able to prepare your accounts accordingly to maximise your chances of your application being accepted. This saves you the time and hassle of preparing your accounts yourself.
Additionally, an accountant can make you appear more professional and financially organised, which could also boost your chances of mortgage acceptance.
However, accountancy services can be expensive and may put too much strain on your financial situation. You need to save up a deposit and make your financial statements look healthy – if paying for an accountant prevents this, then don’t hire one.
FAQs
How much can I borrow on self-employed mortgages?
Lenders will calculate how much you can take out on a mortgage as a self-employed person by analysing the net profit of your last three years’ worth of trading. Every lender will have their own way of calculating this. However, most lenders can grant self-employed people mortgages that are around four times their annual salary.
Can you get a mortgage if you’ve only been self-employed for a year?
It’s not impossible to get a mortgage after having been self-employed for a year; however, it is incredibly difficult to do so. Most lenders require 2-3 years’ worth of financial documentation to prove you’re suitable for a mortgage. However, you may be able to find a lender offering a mortgage with large interest rates to those who have only been self-employed in the short term.
Do self-employed people have to pay more for a mortgage than everyone else?
There’s no reason why a self-employed person should have to pay more for a mortgage than someone who isn’t self-employed. As long as the self-employed person can provide a tax year overview, proof of address, payslips, and other financial accounts, you should be able to gain the same mortgage rate as people who aren’t self-employed.
Sources:
https://www.experian.co.uk/consumer/mortgages/guides/self-employed.html
https://www.crunch.co.uk/knowledge-personal-finance/self-employed-mortgages