Mortgage Advice for Self-Employed
Are you self-employed and facing the overwhelming task of obtaining a mortgage? Don't worry – Hello Mortgage's team of experts is here to provide essential advice and guidance.
Do you own a business? Have you recently become self-employed but still need the security of obtaining a mortgage? If so, then you’ve come to the right spot! The experts at Hello Mortgage are here to walk you through everything there is to know about securing a mortgage when self-employed. Whether that means laying down all your options and helping you determine which one is best for your needs or even guiding you with personalised advice on how exactly to apply for the loan – we have got you covered. Our goal in this post is to make sure the process of getting a mortgage as smooth and hassle-free as possible. So let's dive right in and learn more about getting approved for that exciting homeowner milestone!
Self-Employment
Self-employment in the UK covers a broad range of individuals who work independently rather than as employees for companies, choosing to create their own income-generating opportunities. These industrious people possess the flexibility and freedom to manage their own businesses, set their own working hours, and, in many cases, work from the comfort of their homes. However, this autonomy also comes with certain responsibilities, such as paying taxes and national insurance contributions, managing invoices, and keeping track of financial records. Overall, being self-employed in the UK means that you are your own boss, experiencing a sense of accomplishment and satisfaction as you pursue your ambitions and contribute to the economy.
Is it possible to get a mortgage if i'm Self-Employed?
Obtaining a mortgage as a self-employed individual is entirely possible, although there may be differences in the application process compared to those in traditional employment. Lenders and Banks have become increasingly understanding and flexible in accommodating the unique circumstances of the self-employed, taking into account the distinct nature of their income stream and financial documentation. To maximise your chances of being approved for a mortgage, it is essential to maintain accurate records of your income and ensure that you continue to demonstrate a consistent and stable revenue stream. In addition, having a strong credit history and working with a knowledgeable mortgage broker like Hello Mortgage who can assist you in navigating the sometimes complex nature of the self-employed mortgage landscape, while ensuring you secure the best possible mortgage deal for your individual situation.
Am I less likely to get a mortgage if i'm Self-Employed?
When it comes to securing a loan with a mainstream lender, you might face a bit of an uphill battle. You see, most mainstream lenders are a bit skeptical about working with self-employed individuals, as they're seen as a higher risk. Unpredictable income and difficulty in verifying employment history can make lenders uneasy, and nobody wants to take a chance on someone who might not be able to meet the repayment requirements. So, it's nothing personal, just a matter of managing risk. But don't fret, there are plenty of alternative lenders out there who understand the hustle and are more than happy to lend a helping hand to the self-employed.
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How is income assed when applying for a Self-Employed Mortgage?
When you're self-employed and seeking a mortgage, you might be curious about how lenders will evaluate your income. Fear not, as the process is quite straightforward! Lenders take your taxable income from the past two or three years into consideration, usually averaging it out to arrive at a figure they feel confident you earn on a regular basis. They'll require documentation to back up your claims, including tax returns, financial statements, and possibly a letter from your accountant. Lenders may also consider any unseen expenses linked to your business that could affect your net income. The key is being organised and prepared to showcase your financial stability.
Lenders also like to see..
it's essential to understand how lenders determine your income because it can drastically impact the amount they're willing to lend. The way your income is calculated hinges largely on your occupation—being a sole trader, a partner in a business, or an owner-employee of your own limited company has its own unique impact on the assessment. The nitty-gritty details might vary, but one thing remains constant: in most cases, lenders evaluate your average annual income based on your accounts from previous years. From there, they'll deduce your maximum borrowing limit by multiplying this calculated income by 4, 5, or even 6, though this factor varies according to each lender's particular eligibility rules. So, regardless of your occupation, your income from past years will play a big part in determining the capital at your disposal when considering a mortgage.
The property's location also plays a crucial role, as lenders might be more inclined to approve a loan for a property in a thriving area that is likely to retain its value. Equally important is the amount you've saved for an initial deposit or the equity already invested in the property if you're remortgaging. A more substantial deposit could make a lender more comfortable with granting your loan. Lastly, your age might also be taken into account, as lenders may be hesitant to approve loans for individuals who might be nearing retirement age or those who have just started their self-employed journey. Regardless of your employment status, it's important to remember that numerous factors contribute to the approval of a mortgage.
What is the minimum duration of self-employment required to qualify for a mortgage?
You might be wondering how long you need to be self-employed before lenders consider your application for a mortgage. The good news is that if you've got three years' worth of accounts, along with the relevant SA302 forms showing the income you've earned and the tax you've paid, mortgage providers are more likely to take your case seriously. But even if your venture has been up and running for less than three years, don't lose hope! There are some mortgage providers out there who are willing to work with businesses that have been around for a shorter time, typically at least two years. Admittedly, your options might be more limited, but with the guidance of an expert mortgage broker, you can find a lender that caters specifically to self-employed individuals in situations just like yours.
Lenders often prefer to see a longer track record of income, but here's the good news: if you've had a strong recent period of accounts, even if it took you a couple of years to get your business up and running, there are lenders out there who will be more than happy to consider just one year's worth of figures
I have less than one year of accounts, can I still get a mortgage?
There's a select group of lenders who are willing to consider your case, even if you haven't hit that one-year mark. Of course, there will be certain requirements, such as having your financial records signed off by a qualified accountant. While your choice of mortgage products may be limited and potentially carry higher interest rates due to the unique situation, it's far from impossible. One option you could consider is applying for a mortgage in principle, which hinges on your earnings meeting certain standards at the end of your first 12 months. This way, you can secure a deal in advance and confidently place an offer on a property without having to wait for that full one-year milestone.
What Loan to Value should I aim towards?
When thinking about how much of a deposit you'll need, it's important to note that the majority of lenders typically expect at least a 10% deposit, which translates to a 90% loan to value (LTV). This standard applies regardless of your working situation. However, factors like having less than three years of accounts or a history of adverse credit may lead your provider to request a larger upfront payment to mitigate their risk. On the flip side, you might need as low as a 5% deposit if you find a flexible deal from a specialist self-employed mortgage provider or use an initiative like the Help to Buy scheme. Ultimately, the more you can put down for your deposit, the better your chances are of securing a deal with favourable rates and terms. Try our Calculator and how much you could potentially borrow.
Is it possible to get a Buy-to-Let mortgage if i'm Self-Employed?
Securing a Buy to Let (BTL) mortgage is an achievable goal for aspiring property investors, as long as you're able to meet the lender's eligibility criteria. In recent years, many lenders have scrapped traditional minimum income levels for BTL loans, making the process more accessible to a wider range of borrowers. Now, as long as you can demonstrate that your rental income will be sufficient to cover your mortgage repayments—with a bit of wiggle room—you won't need to divulge your full earnings or future income expectations. Experienced landlords are in a particularly favourable position when it comes to accessing more attractive mortgage deals. With a proven track record of successful investments and consistent repayments under their belts, it's clear that they know the ropes and can be trusted to manage their investments responsibly.
How it works depending on your business entity
- Limited Companies
The income assessment process for limited company directors can be more complex compared to sole traders and business partners, due to differences in income structure. Directors typically pay themselves a salary through the PAYE system and receive remaining earnings in the form of dividends. To optimise tax efficiency, it is recommended for directors to take a small salary up to the tax-free threshold and minimise dividend payouts to reduce income tax and reinvest more capital into the business. However, this approach may result in lower income on paper, which can pose challenges when applying for self-employed mortgages. Income multiples may not accurately reflect the company's profitability, which can limit borrowing options for directors.
Fortunately, some lenders now use affordability-based assessments instead of traditional income multiplication models, considering the full company profits rather than the director's lower income. This widens the range of properties that can be purchased. To apply for a company director mortgage, applicants must provide their business and personal bank statements from the last three months, SA302s or a reference from their accountant (or both), and copies of bank statements to analyse outgoings.
- Sole Traders
Navigating the mortgage process as a sole trader or partner can be a unique experience. Lenders will take an in-depth look at your financial situation by examining either your net profit or the total income you received, as reflected in your SA302s. To calculate your borrowing limit, they'll determine your average earnings and then multiply this figure by their income multiple. Although it might seem daunting, it's essential to come prepared with at least a year's worth of accounts, or better yet, two or three years. On top of that, gather up records of your expenses, as well as copies of your most recent bank statements. By providing this information to the lender or broker managing your application, they can gain a comprehensive understanding of your financial commitments and better tailor a mortgage plan to suit your needs. Overall, taking these steps will ensure a smoother and more personalised experience when applying for a mortgage as a self-employed individual.
- My business is showing a loss, can I still get a Self-Employed mortgage?
If your business has experienced a loss in the past three years, lenders may view your income as unreliable and reject your home loan application. It is, therefore, advisable to wait until your business has fully recovered before applying for a mortgage to increase your chances of approval.
In the case that your business incurred a loss more than three years ago and has since improved its profits, your likelihood of being approved for a mortgage is higher than if the loss occurred more recently and negative figures are still being reported.
Can I Re-Mortgage if i'm Self-Employed?
As a self-employed individual, you can access the same remortgaging products as anyone else. However, you must be more meticulous in proving your income and ensure your finances are in order before embarking on your search to ensure a smooth remortgaging process.
Take note of the end date of your current mortgage term and ask your broker to search for rates from different providers about three months before this date to determine if you can save on your monthly repayments. Before committing to a switch, check with your existing lender to see if they can offer you more competitive rates; some are willing to let current customers transfer to a different product with a lower interest rate.
If you intend to remortgage your current property to raise funds to start or invest in a business, you may face difficulty finding a mortgage lender who will approve your application. Most High Street banks only consider releasing equity from a property for purposes such as clearing debt, making vital or substantial home improvements, or a large purchase such as a new car or a dream holiday. However, it is still possible to remortgage for capital if you have a low loan to value (LTV) of less than 85%, and there are specialist mortgage providers who consider these types of applications. If you require assistance in this area, our team can search the entire market to identify a provider that allows this type of remortgage deal.
If you are presently employed but plan to work for yourself soon, avoid taking the plunge just before your existing term ends. Securing a new mortgage or remortgage with less than a year's accounts is more challenging, and you may not be able to switch products or providers at all. Consequently, you may have no option but to move onto your lender's standard variable rate (SVR) and pay a higher monthly interest rate than necessary.
How to Improve the likelihood of being accepted by a lender
If you are a self-employed individual looking to apply for a mortgage, here are some tips to increase your chances of approval:
- Provide at least three years' worth of accounts
- Ensure that your proof of income is prepared by an accountant
- Avoid having a loss in your business for the past three years
- Have a substantial deposit, ideally at least 10% of the purchase price
- Maintain a good credit score and avoid missed payments, CCJs, IVAs, or other credit issues
- Ensure that your age is under 75 when your mortgage term ends.
Meeting these criteria will give you access to a broader range of deals from various lenders. If you need further assistance, our experienced self-employed mortgage advisors can help. They possess in-depth knowledge of the self-employed mortgage market and have helped numerous sole traders, partners, limited company owners, contractors, and freelancers secure a mortgage for their dream property. Additionally, they can connect you with specialist lenders if you have difficulty proving your income, have been trading for less than three years, or have a less-than-perfect credit history.
How do credit reference agencies calculator my credit score?
Credit scores are assigned to every individual, whether they are employed or self-employed, by the three main credit agencies - Experian, Equifax, and TransUnion. You can access your free credit report from these agencies by clicking here.
Each of these agencies utilises different indicators and scales to assess your creditworthiness. Their primary objective is to evaluate your financial responsibility based on your past records with creditors. The higher your score, the better your credit rating.
Creditors will inform the credit agencies about any missed payments, County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs), or bankruptcy that you might have experienced. Defaults and other payment issues can appear on your credit report for up to six years, after which they will disappear, even if you are still in the process of clearing your debts.
IVAs and bankruptcy can significantly impact your credit score. However, defaults on payments to phone companies and utility providers, especially if they occurred recently, can also lower your overall rating.
I have bad credit, can I still get a Self-Employed mortgage?
Having a history of adverse credit can make it difficult to secure a good mortgage deal, or any deal at all, even if you have a profitable business and can prove your income. Mainstream lenders are likely to offer you higher interest rates due to the higher risk of non-payment that you pose compared to someone with a spotless credit record.
One option to improve your chances of obtaining a self-employed mortgage with adverse credit is to wait until these negative marks drop off your credit file. However, if you can't postpone your purchase, there are steps you can take to enhance your credit score and clean up your credit file.
How do I improve my credit score?
- Start by reviewing your credit reports. Obtain copies from the three main credit bureaus, Experian, Equifax, and TransUnion, and scrutinise them thoroughly to ensure that all the information is accurate. If you discover any errors, correct them as soon as possible by contacting the creditor or the credit bureau and requesting that they investigate the error.
- Register on the electoral roll. Lenders will cross-check the address on your mortgage application with the address on the electoral roll. If they match, it confirms your residency and satisfies another criterion that the provider has.
- Ask your mortgage broker or lender to conduct "soft" credit inquiries. If you already have a negative credit history, you do not want to further harm it by applying for several "hard" credit checks while attempting to secure a mortgage. Whenever feasible, ask your mortgage broker or prospective lender to conduct quotation searches rather than full credit searches, as these will not leave a mark on your credit report.
- Pay off as many of your debts as possible. We understand that this is easier said than done, but the more debts you can clear, the better. Doing so will demonstrate to the lender that you are serious about improving your finances. Additionally, reducing some of your monthly payments will significantly improve your debt-to-income ratio, which may be used during your affordability assessment to determine how much money you can allocate towards your monthly mortgage payments.
- Save a larger down payment. The more equity you can obtain right away, the less you will need to borrow. Saving even an additional 5% toward your new property might expand your search to include a wider range of products and providers.
- If you have no credit history, start using credit responsibly. If you have no credit history at all, obtaining a good mortgage deal may be difficult. This is because the lender will be unable to assess your reliability based on past events. To establish a healthy credit profile, use a credit card for your daily expenditures in the months preceding your mortgage application. Ensure that you always pay off the balance in full at the end of the month, with no exceptions. Alternatively, you may simply obtain a credit card and not use it. This demonstrates that you have available credit in your name.
Important points to consider when applying for a Self-Employed mortgage
- Get in touch with one of our friendly and knowledgeable mortgage brokers who understand the unique challenges you face and can assist with managing your application from start to finish.
- Ensure that you have been trading for a minimum of 12 months, ideally three years.
- Collect evidence of your income, such as bank statements, filed company accounts, and/or SA302s.
- In the months leading up to your application, reduce unnecessary expenditures, opening new or additional credit lines (credit cards, loans), and use the time to pay off any outstanding debts.
- Save a deposit of at least 10% of the purchase price, ideally more!
- Go through your credit history with a fine comb and take measures to enhance your credit score if required, including reporting any mistakes to TransUnion.
Book an appointment today with Hello Mortgage - We have helped many Self-Employed individuals find the best mortgage suited to their needs
At Hello Mortgage, we take immense pride in our exceptional history of assisting self-employed individuals in discovering and securing the perfect mortgage tailored for their needs. We fully understand the unique challenges that self-employed people face when searching for the right mortgage option. Our friendly and casual approach makes the entire mortgage hunting process more enjoyable and less stressful for you. With our vast experience and extensive knowledge in the industry, we strive to consistently offer personalised solutions that perfectly align with your financial goals and aspirations. So, whether you're a budding entrepreneur or a seasoned freelancer, let Hello Mortgage be your partner in creating a bright mortgage future for you! - say Hello to great Mortgage advice today!
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