Self Employed Mortgage - How to Improve your Chances of Getting One
Whether you're a company director or a sole trader, you've probably noticed that high-street mortgage lenders have tougher lending criteria when it comes to self employed mortgage applications.
And with the Covid-19 pandemic putting a strain on the economy and small businesses in particular, banks have been tightening their restrictions for self employed borrowers.
But there ARE lenders out there offering great mortgages to self employed people, and who take into account the nuances of self employed income and see the bigger picture of your business's potential.
In this blog:
- Why is it difficult to get a self employed mortgage?
- Our 4 Top tips for getting 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?
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 that you are applying for the same mortgages as employed people, who have 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 constantly changing
Since Covid-19, mortgage lenders have been constantly adapting their lending criteria to the post-pandemic economy. This is unpredictable, reactionary, and constantly changing.
Some banks now have very different lending criteria to others, especially when it comes to self employed income applicants.
This makes it difficult to know whether your application will be accepted, and difficult to choose which lenders to approach.
Too many rejected mortgage applications will leave a red flag against your name. This is why using a specialist mortgage broker is often the safest and quickest option when applying for a mortgage as a self employed individual.
We can take a detailed look at your company's business model, accounts and income before and during the pandemic to understand how you've adapted throughout the lockdowns and difficult 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 easier and simplified, and you're more likely to be accepted.
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.
- But there are still lenders who 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 to Covid-19 working, 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 wider 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.
4 Top tips for getting a self employed mortgage
Can you get a self employed mortgage? Yes. But you need to tick 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 main 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).
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 evidence your business’s longevity, the better. This could affect how much you can borrow, and how much interest you have to pay back.
2. Use an accountant
Some lenders only accept your application if your income is signed off by a chartered accountant.
Your projected income and borrowing power is 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 your mortgage to be calculated on.
If you own a limited company, taking dividends as your main 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.
You should also consider how much cash you are retaining in your business.
Some lenders see this as capital that can be drawn on as an income and factor it into their mortgage calculators.
But 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 to do 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)
4. Get a bigger deposit
This is a somewhat obvious one - 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 are to be accepted and get better mortgage rates.
And if you can push your deposit into the next percentage band, this could be the difference.
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.
Even going over the LTV band threshold by as little as £100 can increase your chances even further and get you better interest rates.
Savings to show...
If you have savings, make sure you inform your lender even if you think they're irrelevant. They can take these into account as a reserve you can fall back to repay your mortgage on should you experience fluctuations in your income levels.
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 require an SA302 to prove your income to your mortgage lender.
- Freelancer - Similar to a sole trader, but you likely work for different companies perhaps with longer 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 then you will likely be paid via a mixture of salary and dividend payments. Make sure your lender factors in all of your income sources as well as any retained profits within your business.
Be careful - don’t change your self employed income if you don’t have to
If you are considering changing the structure of your self employed income (for example, you’re a sole trader looking to incorporate a limited company) then you should consider waiting until after you have applied for a mortgage.
Even though you may end up earning 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 that doesn’t have 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 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 in 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 good mortgage.
And if you need a self employed mortgage it's even more important:
- Different lenders have different criteria
We know who will accept your circumstances and who won’t. Some high-street lenders have an almost factory-like lending criteria in place to ensure their mortgage brokers stick to their robust procedures.
But specialist lenders have more flexible and bespoke criteria for underwriting and sustain a more open dialogue with our mortgage brokers so that they can fully appreciate the value in your self employed income.
- Lender criteria is changing
Lender requirements are changing constantly. Our brokers are arranging mortgages every day 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 different customer service agents that can take days to resolve issues.
- We can advise on the best product for you
Every application is different, and if you don’t know all the options available to you, you can’t pick the best one. We have the lender market knowledge and qualifications to make the decision for you.
Speak to our team now on 0117 959 5094.
Or complete our enquiry form below to get the answers you need.