What Is A Self Employed Mortgage?
There’s actually no such thing as a ‘self-employed mortgage’. You are going to get a normal mortgage, but you may have to jump through more hoops to prove your income than someone who is on a company payroll. There are, however, particular mortgage products targeted towards self-employed people and your mortgage adviser will help pinpoint these, if they’re more suited to you than standard ones.
What Information Will I Need to Get a Mortgage?
Most lenders will want to see at least two years’ accounts or tax returns. The more accounts you can show the better. You’ll definitely need…
- Accounts – at least 1 year, although some lenders will only consider you with 2 years’
- A track record of regular work
- A healthy deposit
- A good credit history will be helpful – it’s not, however, vital as we can assist bad credit self-employed individuals to obtain a mortgage too
When lenders determine how much to lend to you, they generally base their calculations on your average profit in the past few years. Lenders prefer borrowers to employ an accountant to prepare self-employed workers’ accounts. Make sure your accounts are up-to-date and in order before you apply.
If you don’t have two years’ accounts, don’t panic. Some mortgage lenders will still consider your application, especially if you can prove a track record of regular work, you have left employment to work as a contractor in the same industry, or you have evidence of work lined up for the future.
In other cases, if you already have a mortgage and want to remortgage to save money or move home, your existing lender may be able to help. They have a history with you, and know you meet your repayments so are far more likely to help than a lender who doesn’t know you.
As with any other borrower, it will massively increase your chances of being accepted for a mortgage if you have a decent deposit or chunk of equity in an existing property.
A squeaky clean credit record will also boost your chances of getting a mortgage. A lender won’t just credit check you, they will also credit check your business by running a check on your business address. So make sure that credit report is in the best possible shape too, sort out any unpaid or late debts and check the report yourself to make sure there aren’t any mistakes that could damage your chances of getting a mortgage.
How Does My Business Affect My Mortgage Chances?
When you set up your own business you have a choice of three main business structures to choose from. Which one you pick will influence how lenders view your income.
Sole trader –
As the name suggests, sole traders are one-man bands. Keeping records and accounts is fairly straightforward – and you get to keep all the profits.
It’s these profits a lender will look at when assessing your income. If you do your tax by self-assessment and get HMRC to calculate it for you, you may get a form called an SA302, which shows the total income received and total tax due. It is important to keep Tax Calculations and Tax Year Overviews. Your lender may want to see these forms, alongside your accounts, so dig it out and have it ready.
If you go into business with someone else, you might set up a partnership. When looking at your income, mortgage lenders will look at each partner’s share of the profit. So, make sure you have accounts that show exactly how much money you made so your potential mortgage lender can easily see your annual income.
Limited company –
Setting up a limited company means you keep your business separate from your personal affairs. A limited company will have at least one director and, in some cases, a company secretary.
Directors normally pay themselves a basic salary plus dividend payments. Make sure the lender takes both these elements of your income into consideration when assessing mortgage affordability. Alternatively, they may take salary plus your share of net profit instead of dividends.
How Do I Prove My Income When I’m Self-Employed?
In order to prove your income you will need to be able to provide your lender with at least one year and sometimes two years of accounts.
There are a couple of common problems you may come up against when proving your income. Firstly, in the past you and your accountant, will probably have been keen to legally reduce taxable income in order to pay less tax. However, this could count against you when applying for a mortgage as suddenly you need to show the biggest income possible.
Secondly if you’re a director of a limited company, you might have profits that you choose to retain in the business, rather than take out as salary or dividends.
Some mortgage lenders consider retained profits when assessing an application, but some don’t. In some situations this can mean company directors find it more difficult to get a mortgage than their employees. A good mortgage adviser will be able to help you find a lender that will take retained profits into account.
How Do I Find a Mortgage when I’m Self-Employed?
Use a firm of experienced mortgage advisers, and let them do all the hard work. At Right Mortgage UK we help people from all around the country, not just on our doorstep of Harrogate, find the mortgage deal that’s right for them.
What are the basic Do’s and Don’ts of applying for a Self-Employed Mortgage?
- Keep up-to-date records and accounts.
- Speak to a mortgage adviser about your options at an early stage.
- Let us also speak to your current lender if you’re self-employed and want to remortgage or move house.
- Minimise your income too much for tax purposes – it will affect your chances of getting a mortgage.
- Assume it’s impossible to get a mortgage if you’re self-employed – it’s not.
When Am I Classed As Self-Employed in Mortgage Application Terms?
When you apply for a mortgage, we’ll consider you to be self-employed if you have more than a 20% share of the business from which you get your main income.
If you don’t have payslips to prove your income, we’ll need to see certain documents to help us be confident that you can afford to borrow the amount you need to buy a home. We’ve outlined those documents below as a guide – but your situation is unique, so we may ask you for more documents when you apply.
- As a general rule, we’ll need to see proof of your income for the past two complete tax years.
- Most recent complete tax year
You need to supply the following. The documents must relate to a period ending no earlier than 18 months prior to the date you submit your mortgage application.
- A SA302 from HMRC. But we can also accept the calculations your accountant submits to HMRC, providing it’s on the accountant’s headed paper with a covering letter.
- Your HMRC tax year overview
- A tax calculation (the same options as for your most recent complete tax year)
- Your finalised accounts
If your mortgage application is going to include retained profit or dividends as part of your income, we’ll also need your financial accounts for the same period, produced and signed by a qualified accountant. If you cant supply any of the above then we can still conduct some initial research on your mortgage borrowing amount with draft figures, but everything would need to be finalised prior to application.
What can I do to improve my chances of a successful mortgage application?
- Speak to us first – Not all lenders have the same criteria – we will ensure you are matched with the most suitable lender
- Check your credit file – Ensure there aren’t any adverse entries against you, especially ones you’re not aware of
- Ensure you’re on the electoral roll – Check with your local council, this will help with the credit score
- Make sure your accounts are all up to date – To achieve the most competitive rates you need to have an impeccable credit record, so make sure everything is paid on time. It’s good practice to put everything on direct debit
- Stay away from payday loans – Payday loans do not paint a good picture of your finances, and lenders will often read this as you being in financial difficulty. Many lenders will simply decline to lend if there is a recent record of payday loans, although there are some lenders that accept a history of payday loans – speak to us to find out what options you have
- Minimise credit checks for other insurance or credit applications – Multiple credit checks in a short space of time can reduce your overall credit score. Be aware if using comparison sites for insurance they will run multiple checks – although some aren’t a ‘hard’ footprint
- Don’t allow your credit card to reach its limit – The higher the % usage of your credit card will result in a lower credit score. We’d suggest spreading outstanding balances across two cards, rather than having one on the limit
- Don’t make just minimum payments – Again, making just the minimum payments can suggest to the lender that you could be in financial difficulty. It’s also worth considering this because unless you’re on an interest-free card, the minimum payments will never end up paying down the debt
- Sort your deposit early – Preparation is key, especially if family members are gifting you funds towards your deposit
- If using business funds, speak to your accountant – Taking regular withdrawals can lead to a smoother underwriting rather than taking a large lump sum in one go. When taking a large lump sum the lender may ask the accountant to confirm this will not be detrimental to the business, causing an extra delay in the process
- Get your documents in order – See our documents checklist below
- Get yourself an agreement in principle – Most estate agents won’t let you view the property, let alone make an offer without an agreement in principle – sometimes referred to as a ‘Decision in Principle’. This will confirm the maximum loan to give you peace of mind that you are looking at properties within your budget. It’s also a good indication that your credit is in order.
What other documents do I need have to apply for a mortgage?
Here’s a definitive list of what mortgage lenders will ask for if you’re self-employed:
- ID – Make sure you have valid photographic ID. If you present your driving licence, make sure it has your current address on it
- Proof of Address – A council tax, utility bill or financial statement will suffice. If everything is online, you should change one of your accounts to postal statements. This should be dated within the last 3 months
- Employer – You’ll need to gather three to six months’ payslips and recent P60. If you’ve received extra income such as bonuses or commission, some lenders may require two years worth of P60s
- Limited Company accounts – If you’re a limited company director then the last two years worth of fully signed accounts is required in most cases. The latest accounts cannot be over 18 months old, so try to finalise the latest year’s as soon as possible
- Personal Tax Returns – Self-employed workers need to request three years SA302s and a tax overview from HMRC if available
- Bank Statements – These can include postal or downloaded versions of the last three months’ salary fed bank statements, three months business bank statements and three months bank statements showing rental payments made
- Deposit – You need to provide a statement showing funds held, and a build-up of funds. If funds are a gift from a family member, you need a statement letter from them confirming they have funds or that they have been transferred to you.
- Life insurance or other protection – Lenders will usually need to see evidence of any Life insurance you have in place to cover the mortgage. This usually means they just need to see a copy of the policy summary.
Take a Look At Some of our other Top FAQs on Self-Employed Mortgages
Q: I incorporated this financial year and I am the sole company director. Can I get a mortgage?
A: Your proof of income can be as little as your latest year’s accounts or SA302. An income of £25,000 or more is generally the minimum that lenders expect to see, but some have no minimum income requirement. We’d suggest contacting us to discuss in more detail.
Q: I’ve gone from employed to self-employed since I took out my current mortgage, which is up for remortgage soon. I’m earning more as a self-employed individual, but is it going to be better to move providers or stay put?
A: It’s definitely worth reviewing all mortgage options. We can attain mortgages for contractors with relatively short contracting history. Rates are very competitive at present, and you certainly won’t be penalised for being a contractor. Typically, if you’ve been self-employed for at least 12 months, there are quite a few lenders that can assist.
Q: My limited company shares are split 50-50 between my wife and I. I presume this means it’s best if the mortgage application is in joint names?
A: Yes, it would be advisable to apply in joint names to use all of the income. Many lenders require married couples to apply in joint names.
Q: At the minute my wife isn’t working, although she takes a dividend from her shares in our company. How do we apply for a new mortgage?
A: As long you apply in joint names, this won’t affect your maximum borrowing based on using 100% of the salary and dividends drawn, as reflected on your company accounts or personal tax returns.
Q: My company has one major client – am I going to be penalised for not having multiple clients?
A: The number of clients you have had is irrelevant when using your accounts figures as income verification. This is not something that lenders ask, or can determine from your profit figures.
Q: How much deposit do I ideally need to have for a mortgage application?
A: The minimum deposit that you would require would be 5% for a purchase. Having a bigger deposit will give us more lenders to choose from and the interest rates will improve with each 5% increase in deposit.