Getting a mortgage when you are self employed can feel harder than it has to be. Getting a mortgage as an employer with a normal guaranteed annual income might seem to be the easiest and trouble-free way to get a property, but it is not necessarily so, and self employment can be a big advantage to property buyers. Whether you are looking to buy your own property or buy to let using a buy-to-let mortgage, being self-employed tend to mean a little bit more to go through. However, with the correct preparation, and an expert on hand, it is entirely possible. In this manual, I am going to explain how the self-employed are able to secure a mortgage, what the lenders need, and how a mortgage professional can help you make the process a whole lot less complicated.
Who Is Considered Self-Employed for Mortgage Applications?
For mortgages, lenders will usually consider you self-employed when you own 20-25% or more of a business that is your sole/main source of income and/or if you are self-employed and you pay your national insurance and tax yourself. There are a few main types of self-employed borrowers:
- Sole Traders – Individuals who run their own business and are personally responsible for its profit and debts. Examples could be a one-to-one tutor, a handman or woman, or a cleaner.
- Partnerships – Where two or more people run a business and share the profit (and losses). An example of this could be a law firm where two or more people work and are partners within the firm.
- Limited Company Directors – Business people who operate the business in a limited company, usually being paid a salary and dividends. Much of the money of the business can be handled by an accountant to ensure that money is being handled correctly and things like tax are being calculated and paid correctly.
- Contractors and Freelancers – Individuals working short-term contracts or freelance rather than being full-time.
Each type of self-employed person is assessed slightly differently by lenders.
How Mortgage Lenders Assess Self-Employed Income
One of the greatest challenges faced by self-employed borrowers is proving that they have a stable income. Unlike employees who simply generate payslips, self-employed applicants are required to provide more comprehensive accounts data.
This is how lenders typically assess different types of self-employed income:
Sole Traders and Partnerships
Net Profits: Lenders usually look at your net profits as declared on your SA302 forms or your tax calculation summaries.
Evidence Required: Typically, you’ll need two to three years’ worth of accounts or tax returns. Some lenders may accept just one year, though options are more limited.
Limited Company Directors
Salary and Dividends: Lenders usually consider your salary plus dividends to calculate your income.
Retained Profits: Some specialist lenders will also consider retained profits (profits left within a business) if you retain profits in the company rather than taking them.
Evidence Required: Have your full accounts for your company, your SA302s, and tax year overviews prepared for the previous two or three years and be able to provide them.
Contractors and Freelancers
Day Rate Calculation: Your day rate multiplied by the number of working days in a year (typically 46-48 weeks) will be utilized to calculate income by some lenders.
Contract History: New contracts and an untarnished history of continuous work can enhance your application
Self-Employed Mortgages for Buy-to-Let Investment Properties
If you are self-employed and applying for a buy-to-let mortgage, slightly different requirements may apply:
- Rental Income First: Lenders’ priority focus for buy-to-let use is the prospective rental income from the property.
- Minimum Personal Income: A few lenders continue to require a minimum personal income (typically around £25,000 per year), even if the rental income qualifies under the mortgage.
- Limited Company Buy-to-Lets: More landlords are now acquiring buy-to-let properties within a limited company (Special Purpose Vehicle – SPV) for tax reasons. If you do this, lenders will take into account the company structure and your landlord experience.
Similar to residential mortgages, brief accounts and proof of personal income are crucial if you seek a buy-to-let mortgage when self-employed.
How to Improve Your Chances of Getting a Self-Employed Mortgage
Being properly prepared can work wonders when you apply for a mortgage. Here are some of the important steps you can follow:
- Keep Good Records: Keep your business accounts in order and professionally presented.
- Employ the Use of a Qualified Accountant: Lenders like to see their preferred use of accounts prepared by a chartered or certified accountant.
- Save a Bigger Deposit: A better deposit (20% or more) will enhance your mortgage terms and rates.
- Clear Personal Debts: Clearing outstanding debts can enhance your affordability score.
- Enhance Your Credit Rating: Pay bills on time, reduce credit card limits, and check your credit report for inaccuracies.
- Have Documentation to Hand: Two years’ worth of SA302s, tax year summaries, and business accounts should be ready to be submitted.
How a Mortgage Advisor Can Help Self-Employed Applicants
Getting a mortgage as a self-employed person can be a bit more involved, but off the agenda it is not. With the finances sorted, the proper documents in hand, and expert guidance from a seasoned mortgage broker, you can obtain favourable mortgage terms, whether for your ideal home or your next buy-to-let investment. If you’re self-employed and you’re considering applying for a mortgage in the near future, seeking advice from one of our experienced mortgage brokers at Oportfolio could be the best thing you’ve ever done.
Get in touch with our expert team today to discuss your options and find the perfect mortgage product for you.
