Self Employed Mortgage - How to Improve your Chances of Getting One in 2024

24-May-2024 16:34
in Mortgage
by Sam Hodgson
how to get a self employed mortgage

Whether you're a company director or a sole trader, you've probably noticed that high-street mortgage lenders have stricter lending criteria for self-employed mortgage applications. 

With the strain on the economy and small businesses in recent years, banks have been tightening their restrictions for self-employed borrowers. 

But there are lenders out there offering great mortgages to self-employed people into 2024 who consider the nuances of self-employment income and see the bigger picture of your business's potential. 

In This Guide:

Why is it Difficult to Get a Self Employed Mortgage?

Our 4 Top Tips for Getting a Self Employed Mortgage

How Much Can I Borrow with a Self Employed Mortgage?

What Type of Self Employed Income Can I Use for a Mortgage?

How To Be Prepared and Get Faster Self Employed Mortgage Approval

Do I Need a Mortgage Broker?

self-employed mortgage home

Why Is it Difficult To Get a Self Employed Mortgage?

1. You're applying for the same mortgage as an employed person...

There are no 'specialist' self employed mortgage products.

Self Certification Mortgages used to fill this gap in the market, but since the 2007/8 economic crash, they have become a thing of the past.

This means you are applying for the same mortgages as employed people with guaranteed, long-term contracted income.

But, while there are no specialist products out there, there ARE specialist lenders, and a specialist Mortgage Broker can help you find them.

2. The market is changing... constantly

Since Covid-19, mortgage lenders have constantly adapted their lending criteria to the post-pandemic economy. This is unpredictable, reactionary, and continuously changing.

Some banks now have very different lending criteria from others, especially when it comes to self-employed income applicants.

This makes it difficult to know whether your application will be accepted and challenging to choose which lenders to approach.

Too many rejected mortgage applications will leave a red flag against your name. Using a specialist mortgage broker is often the safest and quickest option when applying for a mortgage as a self-employed individual.

We can examine your company's business model, accounts, and income before and during the pandemic in detail to understand how you've adapted to the lockdowns and challenging periods.

We can then present your story to lenders and help them understand the potential in your business's income going forward so that their underwriting decisions are more straightforward and simplified. You're more likely to be accepted. 

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3. Covid-19 income support grants could hold you back

  • Some banks are completely ruling out anyone who has used these support grants.
  • While others are capping the amount they will loan.
  • However, some lenders still look at the bigger picture and will work harder to understand your situation.

If you're in doubt, speaking to a mortgage broker can help you understand if you're still eligible for a mortgage.

We can take a detailed look at your business, including your accounts, how you've adapted post Covid, how you've used income support grants (for example, if you've invested it into infrastructure and technology to propel your company forward but haven't reaped the profits yet), and also the broader picture of the industry you operate in. 

When we present your case to a lender for their underwriting calculations, they'll be more likely to understand your situation and offer you the maximum borrowing power for your income.

If you're an HNW Individual with a significant income and wealth portfolio, see our complete guide to securing a HNW mortgage

How Much Can I Borrow With a Self Employed Mortgage?

While it always varies depending on your circumstances, our self employed mortgage calculator can give you an idea of how much you can borrow based on your (and your partner's) annual earnings.

If your income has increased or decreased over the last few years, lenders typically take an average of your two latest annual income figures—but there can sometimes be wiggle room on this.

Some lenders can also factor in your latest year's earnings, even if they're not declared yet. 

How much can I borrow?

4 Top Tips for Getting a Self Employed Mortgage

Can you get a self employed mortgage? Yes. But it would help if you ticked all the essential boxes:

1. Prove your income

Mortgage lenders will only accept specific HMRC tax documents as proof of your self employed earnings. 

The primary documents are:

  • Your SA302 (Tax Calculation)
  • Your Tax Year Overview

Get these ready in advance and for at least the last two years (the more, the better). But even if you have only 1 years of accounts, we might still be able to get you a mortgage. 

If you've submitted tax returns for the relevant years, you can download these online or request them in the post from HMRC.

What else could lenders ask you for?

Some lenders will ask you for information on future contracts or prospects as proof of your upcoming work so they understand the likelihood of you keeping up with your mortgage repayments. 

The more you can provide evidence of your business’s longevity, the better. This could affect how much you can borrow and how much interest you pay back.

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2. Use an accountant

Some lenders only accept your application if a chartered accountant signs off your income.

Your projected income and borrowing power are more reliable from a bank’s perspective if it has this certification.

Remember—the most tax-efficient self-employed income isn’t always the best income structure for calculating your mortgage.

If you own a limited company, taking dividends as your primary source of income is sometimes the most tax-efficient method.

However, it doesn’t necessarily look better from a lender’s perspective, and some prefer to use a salary for their mortgage underwriting calculations.

Company Cash:

It would help to consider how much cash you retain in your business.

Some lenders see this as capital that can be drawn on as an income and factor into their mortgage calculators.

Others rule it out of your application completely. In this case, it would be worth drawing more income or approaching a different lender.

3. Better credit score – better mortgage

The higher your credit rating, the more likely you'll get a self-employed mortgage. 

While it’s not the be-all and end-all for your mortgage application success, you should iron out any red flags that might come up in your credit report.

Here are some top tips for doing this:

  • Use a credit card and pay off your credit cards regularly and on time
  • Pay your bills via direct debit
  • Tidy up old bank accounts
  • Avoid using your overdraft
  • Use the Rental Exchange Initiative (if you’re currently renting)
  • Use Experian Boost – so that your Netflix, Spotify, Council Tax payments and other payments can boost your score
  • Un-link yourself from ex-partners (you might not realise you are still financially connected)

See our guide How To Get A Mortgage - 19 Top Tips For Borrowers, for more help

4. Get a more significant deposit

This is somewhat obvious - the more funds you put up yourself, the less your mortgage provider needs to lend you. The better your loan-to-value ratio (LTV), the more likely you will be accepted and get better mortgage rates.

And if you can push your deposit into the next percentage band, this could be the difference.

For example...

Your current deposit is 19% of your property value (you might not even realise it), and pushing it up to 20% won't take much, but it could mean you get accepted for a mortgage at better rates than before. 

Going over the LTV band threshold by as little as £100 can increase your chances and get you better interest rates.

Savings to show...

If you have savings, inform your lender, even if you think they're irrelevant. They can consider these as a reserve against which you can fall back to repay your mortgage should you experience fluctuations in your income levels.

While here, please read about our top 7 ways to borrow more with the right mortgage product.

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What Type of Self Employed Income Can I Use for a Mortgage?

You can get a self employed mortgage if you are a: 

  • Sole Trader – you work for yourself and keep all the profits from your business. You pay income tax, so you require an SA302 to prove your income to your mortgage lender.

  • Freelancer - Like a sole trader, you likely work for different companies, perhaps with more extended contracts. If so, proving future contracts and arrangements could be great for your mortgage application.

  • Partnership—If you are in partnership with another shareholder, make sure you can prove your ownership and earnings from the business to your mortgage provider.

  • Limited Company—If you've incorporated a limited company, you will likely be paid a mixture of salary and dividend payments. Ensure your lender factors in all your income sources and any retained profits within your business.

Be careful - don’t change your self employed income if you don’t have to

Suppose you are considering changing the structure of your self-employed income (for example, you’re a sole trader looking to incorporate a limited company). In that case, you should consider waiting until after you have applied for a mortgage.

Even though you may earn more net of tax by doing so, the change could cause an issue with your mortgage lender, as they might view it as a new form of income without years of history to back it up.

How To Be Prepared and Get Faster Self Employed Mortgage Approval

When you find your dream property, you need to move fast.

Particularly in the current market, we've found that properties are being snapped up incredibly quickly, so you don’t want your mortgage application to slow you down.

Here’s a list of the essentials to get together before you make your application:

  • Recent Bank Statements (preferably showing a regular and reliable self employed income stream)
  • ID documents & proof of address (e.g., passport and driving license) - check these to ensure they are still in date!
  • SA302 Forms (Tax Calculation) for 2+ years
  • Tax Year Overview for 2+ years 

Do I Need a Mortgage Broker?

Because of the complexities of self employed mortgages, a specialist mortgage broker is vital to getting the best deal for your circumstances. 

Even with standard mortgage applications, having a mortgage adviser check the entire market for the best deals available gives you peace of mind you're getting a suitable mortgage. 

And if you need a self employed mortgage, it's even more critical: 

  • Different lenders have different criteria

We know who will accept your circumstances and who won’t. Some high-street lenders have almost factory-like lending criteria to ensure their mortgage brokers stick to their robust procedures.

However, specialist lenders have more flexible and bespoke underwriting criteria and sustain a more open dialogue with our mortgage brokers so that they can fully appreciate the value of your self-employed income. 

  • Lender criteria are changing.

Lender requirements are constantly changing. Our brokers arrange mortgages daily and are in tune with the best deals as soon as they come on the market. 

  • Save time & hassle

We know exactly what you’ll need for your mortgage application and liaise directly with our contacts at each lender on your behalf. You won’t have the relentless back and forth between customer service agents that can take days to resolve issues. 

  • We can advise you on the best products for your situation.

Every application is different, and you can't pick the best one if you don’t know all the options available. We have the lender market knowledge and qualifications to decide for you.

To see what we can do for you, call us at 0203 900 4322 or book a free consultation below.

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