Whether you are a Sole trader, in a Partnership or a Director of a Limited Company becoming self-employed takes guts and the freedom it offers can be priceless, but it does come with its difficulties, including getting a mortgage. Being a specialist broker Mortgage Squared can help you to overcome these difficulties explaining complex incomes and holistic working, for the process to become a walk in the park.
Our guide explains the different schemes available.
What’s in the guide?
• Preparing for your self-employed mortgage
• What if I don’t have enough evidence of my income?
• Mortgages for different company types
• How much can you borrow?
• Mortgage readiness checklist
Preparing for your self-employed mortgage
Banks and building societies want to offer mortgages to everyone who can afford to make the repayments. Before they agree to lend you money, lenders will want to see evidence of your income and your finances in general. If you have a traditional job, with a salary and a monthly pay cheque, your income is easy to prove. You would simply show the bank your pay slips and copies of your bank statements, and the lender would calculate the maximum amount you could borrow. For self-employed people, the challenge is slightly harder, and you may need to take steps to prepare your accounts and documentation, so it meets the lender’s criteria. Different banks have different lending criteria; with some banks requesting more years of accounts or other evidence of your income.
Lenders typically ask to see:
- Accounts: 1-3 years of accounts, prepared (and signed) by a chartered or certified accountant
- SA302: 1-3 years tax calculations – end of year tax returns, along with the corresponding tax year overview from HM Revenue & Customs.
- Bank statements: 3 months of your business bank statements, if applicable
What if I don’t have enough evidence of my income?
Are you new to being self-employment? Banks and building societies may consider other evidence of your income, particularly if you have a history of working in a related profession or evidence that your future income is guaranteed.
This is one of the first checks a lender will make, so it’s important that your credit score is healthy and there are no issues with your credit report. Your credit score is based on your history of borrowing and repaying. The better your history, the higher your score. Register with one of the credit reference agencies to check your history. If you uncover any issues, you may need to resolve them or wait until your credit score improves. A good credit rating is key to getting an Agreement in Principle (AIP), which is the first step in getting a mortgage. Read our Guide to how to improve your credit score.
How much do you need to contribute towards the property price? Currently, a 95% mortgage is the largest loan-to-value mortgage that is available, and even these mortgages are more difficult to obtain. If you have a 5% deposit, you may be able to get a mortgage, but be aware that banks will charge you a higher interest rate for these products. If you can gather a 10% deposit, then you will be able to access mortgages with more favorable interest rates, and also have greater protection in case property values fluctuate. Try our Mortgage Calculator.
When evaluating your options, remember that you may also need to pay stamp duty, solicitor fees, and moving costs – so you’ll need this in addition to your deposit fund. If you are a ‘first-time buyer’ stamp duty may not apply. See below for an overview of these costs
If you are getting a mortgage with your partner/friend, then their income will be included in calculations to decide your maximum loan amount. They will also need to provide the same level of evidence and documentation, whether they are self-employed or salaried. You should also encourage them to register with a credit agency to confirm they have a healthy credit rating.
Mortgages for different company types
As we mentioned earlier, mortgages are mortgages; they’re the same whether you’re employed, freelance or a limited company. The only differences relate to the evidence of income that you must provide.
Lenders will want to see at least one years’ trading history, though most will want to see two years’ history – and some will want three. The more evidence of successful trading that you have, the more lenders your mortgage advisor can consider.
If you operate as a limited company, your income probably consists of a salary and dividends. Lenders will need to consider both as your income. In some instances, lenders may be able to use your operating or net profit in addition to your salary.
Lenders will assess your income according to your share of the profits.
How much can you borrow?
In the past, lenders would use a simple calculation to determine how much you could borrow. They would multiply your total income (both you and your partner) by 3, 4 or 5 to give a maximum mortgage amount. This method does not take into consideration your outgoings, so it is no longer considered a safe way to make lending decisions.
Banks and building societies now use many more complex methods to judge how much you can afford to borrow. To reach a decision, lenders look at your past income and your current expenditure to evaluate your maximum loan amount. Your lender may also want to know about any regular contracts you have as this will reassure them that your income is likely to remain stable. Your debts are also part of the affordability equation, which is why it is helpful to reduce your debts before applying for a mortgage. Read our blog post ‘How much can I borrow for a mortgage?’
Mortgage readiness checklist
Banks and building societies have different requirements for self-employed applicants – so ask your mortgage advisor to confirm which documents you need to provide. Typical requirements include:
- 2-3 years of company accounts
- 3 months of bank statements
- Joint applicant’s payslips (or accounts)
- Joint applicant’s bank statements
- 5% deposit saved (minimum)
- Know your credit history
- Minimal debt
- Drivers licence or passport
- Proof of address
The key thing to remember is that you stand a good chance of getting a mortgage if you can demonstrate a history of earning as a self-employed person. And even if your records are limited, there may be ways to work around the gaps. To ensure you get the best deal, talk to a mortgage expert who understands the unique factors affecting contractors, small businesses, independent professionals, and freelancers. Read our Blog Post ’13 things that can hold up your mortgage application’.