Self Employed Mortgages - Complete Guide

According to Statista, as of November 2024, approximately 4.4 million self-employed workers are part of the UK workforce. For many of them, buying a home is a long-held dream, but getting a mortgage is challenging.

While employed individuals often have payslips to prove their income, lenders often perceive self-employed applicants as a higher risk due to their fluctuating income.

Self-employed mortgages are the same as standard mortgages. However, the process of qualifying for one is different. Lenders may require more proof of your income and financial stability.

That said, being self-employed doesn’t mean your dream of homeownership is out of reach. With the right preparation, financial records, and understanding of what lenders look for, you can secure the best mortgage deal.

Ready to dive deeper into getting a mortgage when self-employed? Let's explore key steps, eligibility criteria, tips, and expert advice to help you secure your dream home.

A self-employed mortgage is a type of home loan designed for individuals who work for themselves rather than being employed by a company on a fixed salary. While the mortgage itself is not different in structure from a traditional home loan, the way lenders analyse eligibility and income is different. This is because self-employed individuals often have irregular income patterns and may not have traditional payslips to demonstrate their financial stability.

How Self-employed Home Loan is Different from Traditional Mortgages?

For salaried employees, mortgage approval typically depends on regular payslips, employment history, and bank statements. Lenders view this predictable income as a sign of lower risk. In contrast, self-employed applicants must provide other forms of evidence to prove their earnings.

You’ll often need to show:

• Two to three years of tax returns.
• SA302 forms and tax year overviews from HMRC.
• Bank statements showing regular income.
• Evidence of a steady income history.

Challenges Faced by Self-employed Individuals When Applying for Mortgages

• Inconsistent Income: Seasonal or project-based income streams can raise red flags. For eample, A graphic designer might earn a high income during peak project months but see a drop in earnings during quieter periods.
• Document requirements: Without traditional payslips or a fixed employment contract, self-employed applicants need to provide alternative documents to prove their earnings. If these records are incomplete or show fluctuations, lenders may hesitate to approve the mortgage.
• Perceived Lending Risk by Banks: Banks and mortgage lenders often view self-employed individuals as less stable borrowers due to the lack of predictable income. They may worry about the applicant’s ability to make repayments during periods of low earnings or business challenges. As a result, lenders may be more cautious, ask for a larger deposit, or apply stricter criteria before granting a mortgage.
• Limited product choices: Many standard mortgage products are tailored to salaried employees. While some lenders specialise in self-employed mortgages, they may not be as widely available. Additionally, interest rates for these products can sometimes be higher, as lenders compensate for the perceived risk of lending to individuals without fixed employment.

Who Qualifies as Self-employed for Mortgage Purposes?

If you meet any of the following criteria, you are likely to be considered self-employed by mortgage lenders:

1. Contractors: You work on short or long-term contracts for various companies, often without the security of permanent employment.
2. Freelancers: You take on project-based work across different clients without a fixed employer relationship.
3. Small Business Owners: You run your own limited company, either as a sole director or with partners, and your income comes from business profits.
4. Sole Traders: You operate your own business without registering as a company and report your earnings directly through self-assessment.
5. Partnership Members: You share ownership of a business and report your share of the profits on your tax return.

Lenders usually classify you as self-employed if you own at least 20% to 25% of a business and rely on its income.

What Do You Need to Get a Mortgage?

To confirm your earnings, several documents required for self employed mortgage, including:

• ID
• Proof of Address: Utility bills, bank statements or HMRC tax documents are accepted as Proof of Address documents. 
• Bank statements: Apart from being used as proof of income, bank statements are also used for other purposes, such as estimating your expenditure.
• Insurance: Your lender may want to see proof that you have a life insurance policy that can cover the mortgage. 
• Proof of deposit: It's likely that your lender will want to see proof of your deposit, so you'll need to provide a bank statement showing funds that you've set aside.
• Information about your expenses: You may be asked questions about your living expenses, or be asked to complete an expenditure form. This will provide your lender with information on debt repayments, pension contributions, childcare costs, household costs or other significant costs that occur regularly.  
  

You're also required to provide additional information and documents, depending on how you're set up:

• Self-employed: You need to show your SA302 from the past three years, as well as your HMRC tax year overview. 
• Contractor: You'll need to show your day rate and contracts from the last 12 months.  
• Umbrella company: If you're working through an umbrella company, you'll need to show six months' worth of payslips. You may also be asked to show that you have projects lined up for the future, as proof that you're able to maintain or increase your income. 
• Limited company: If you're a limited company director, you need to show signed accounts from the past two years. Do note that the latest accounts cannot be more than 18 months old. 

Here's what lenders will look at, depending on how you're set up:

• Sole traders: If you are a sole trader, lenders look at your net profit as recorded on your SA302 tax return. This figure represents your income after deducting business expenses but before tax. 
• Partnerships: Lenders will look at only your share of net profit. 
• Limited company: Most directors pay themselves a combination of salary and dividends. Lenders add both figures together to determine income. Certain lenders will also take your retained profit into consideration.
• Contractors: Lenders will take into account your annualised day rate. 
  

In general, lenders will look at your net business income, and not your gross revenue when assessing your earnings.

The lender will also use an average of your income. For example, if your 2022 net income was £60,000 and your 2023 net income was £75,000, they will deem your earnings to be £67,500. 

Keep in mind that each lender will have their own lending requirements.

Certain lenders may allow for greater flexibility, and take into consideration other factors such as your credit score, deposit, personal commitments and expenditure when determining the amount that you can borrow.

1. Self-employed individuals can’t get a mortgage

‍This is one of the biggest myths. Lenders are happy to offer mortgages to self-employed people as long as you can prove your ability to repay the loan.

2. Self-employed mortgages are more expensive

Interest rates for self-employed mortgages are generally the same as for employed individuals. If your application shows strong financial stability, you can access competitive deals. 

Luke Somerset, Chief Commercial Officer of John Charcol explains: "There's one main reason why self-employment could mean a more expensive mortgage. And that's if you are turned down by a mainstream lender, and must apply through a specialist lender that deals specifically with self-employed borrowers."

3. You can't stand a chance with mortgage application if you don't have two years' worth of books

While having two to three years' finalised company accounts or personal tax return is the minimum requirement for most lenders, it doesn't mean that you stand no chance at obtaining a mortgage if you're newly self-employed. 

Some lenders will accept one year's worth of books, and there may be others that are willing to consider borrowers without a finalised single year of accounts. 

David Blake, Principal Adviser at Which Mortgage Advisers elaborates: "Some lenders work on a case-by-case basis, and will consider applicants who present a low risk. This could be someone with bags of experience within their industry, who's decided to go self-employed because it is more lucrative. If they have a substantial deposit and can show draft figures from an accountant, it's possible this type of applicant could be acceptable to some lenders."

4. You need a perfect credit score

While a good credit score helps, it’s not the only factor lenders consider. If you have a bad credit score, it doesn't mean that you stand no chances at getting your mortgage loan approved. Apart from the credit score, your income history, deposit size, and overall affordability play a big role too.

However, you may be limited by the types of mortgage loans that are available to you, or may have to work with lenders that specialise in offering loans to individuals with an adverse credit history.

These lenders offer higher interest rates compared to traditional lenders, and may also ask for a larger deposit. You'll need to weigh this against the option of building up your credit score and applying with a traditional mortgage lender, as the latter may prove to be a more cost-efficient alternative.

Getting a mortgage as a self-employed individual is challenging, but there are practical steps you can take to boost your approval odds. By being well-prepared and managing your finances smartly, you can make your application more appealing to lenders. Here are some helpful tips to improve chances of getting a mortgage:

1. Keep Up-to-date Records and Accounts

Don't underestimate the importance of keeping good records. Lenders rely heavily on financial documents to analyse your affordability. Keeping accurate and well-organised records makes it easier to present your financial situation clearly.

Dominik Lipnicki, director of brokerage Your Mortgage Decisions explains that it can make all the difference, as even applicants with stable earnings and a good credit history are rejected due to poor records. 

"It really pays to have up-to-date accounts prepared by a qualified accountant," he adds. "If you scrape through with the bare minimum of paperwork, your options will be very limited and you'll probably end up paying a higher rate."

2. Save for a Larger Deposit

A bigger deposit can significantly improve your chances of securing a mortgage. It reduces the risk for lenders and may also allow you to access better interest rates.

• Aim to save at least 10% to 20% of the property’s value.
• Set up a dedicated savings account to avoid spending the money.
• Consider reducing unnecessary expenses to boost your savings faster.

3. Minimise Existing Debt

Lenders evaluate your debt-to-income ratio to determine your ability to manage mortgage repayments. Reducing your existing debts can improve your affordability.

• Pay off credit card balances and personal loans where possible.
• Avoid taking on new debt before applying for a mortgage.
• Focus on paying down high-interest debt first.

4. Maintain a Good Credit Score

A higher score shows that you are a responsible borrower and increases the likelihood of approval.

• Check your credit report regularly for errors and correct them.
• Pay bills on time to avoid negative marks on your report.
• Keep credit card balances low and avoid maxing out limits.
• Limit the number of credit applications you make.

5. Keep Tax Deductions to a Minimum

Nikki Merkerson, Community Reinvestment and Community Partnership Officer at JPMorgan Chase advises that self-employed workers should "write off fewer expenses for at least two years before applying for a mortgage". 

Lenders look at your net business income—so individuals who deduct a lot of expenses show an income that appears much lower than it actually is. This works against you when you apply for a mortgage, as you "need to show more money to afford more house", states Merkerson. 

6. Use an Accountant for Professional Bookkeeping

A qualified accountant for self employed individual can prepare clear and accurate financial documents that meet lender requirements.

• They can help produce certified accounts, which many lenders prefer.
• Accountants can also provide guidance on how to present your income more effectively.

7. Provide Additional Evidence of Consistent Work/Contracts

If your income varies, providing evidence of ongoing work can help convince lenders of your financial stability.

• Show signed contracts with clients for future projects.
• Include a list of regular clients and details of ongoing work.
• Present a portfolio of completed work, especially for freelancers.

8. Speak to a Mortgage Broker

Each lender will have their own lending criteria; some are willing to take into account your retained profits, while others will accept applicants with less than one or two years of self-employment history. A mortgage broker can save you time by pointing you in the right direction, so you know right away which lenders are a good fit with your needs. 

Shaun Church, director at mortgage broker Private Finance shares: "As the means of calculating income and eligibility can vary considerably, the trick for self-employed borrowers lies in ensuring they apply with a lender that will view their circumstances most favourably. 

"Seeking independent advice through a broker is therefore critical, as they can point you in the direction of lenders not only willing to lend, but also those likely to provide the most favourable deal."

9. Think twice about Switching Your Business Structure Prior to Mortgage Application

Switching between two types of self-employment income just before you apply for a mortgage can complicate matters, and reduce your chances of securing a home loan. 

If you're thinking about switching from sole trader to a limited company, it's best to delay your application until you have enough year's worth of books. If you apply before that, you may be offered a smaller mortgage, or have to choose from a limited selection of lenders. 

Choosing the right mortgage lender is an important step when buying a home The lender you choose can influence your mortgage rates, repayment terms, and overall borrowing experience. Here's tips on finding the right lender:

1. Research Lenders Who Cater to Self-employed Borrowers

Not all lenders have the same approach when assessing self-employed mortgage applications. Some are more flexible and experienced in working with self-employed individuals.

• Look for lenders with a reputation for offering products tailored to freelancers, contractors, and business owners.
• Read customer reviews to understand their experiences.
• Look for recommendations on forums or social media groups focused on financial advice.
• Check if they accept one or two years of accounts rather than requiring three years.
• Ask friends, family, or professional networks about their mortgage experiences.

2. Compare Interest Rates and Fees

Interest rates and additional fees can significantly impact the total cost of your mortgage.

• Compare rates from multiple lenders to find competitive offers.
• Look out for fees such as arrangement fees, valuation fees, and early repayment charges.
• Pay attention to both fixed and variable rate options to choose the one that fits your needs.

3. Check Lender Requirements

Before applying, review the lender’s criteria to avoid wasting time on unsuitable applications.

• Check how many years of accounts they require.
• Look for any specific document requirements, such as SA302 forms and tax returns.
• Confirm their minimum and maximum loan amounts.

4. Checkout Customer Service and Support

The mortgage process can involve multiple steps, so working with a lender who offers good support is essential.

• Look for lenders with responsive customer service.
• Check if they provide clear communication throughout the application process.
• Read online reviews to get an idea of how they handle queries and issues.

5. Consider Flexibility in Mortgage Products

Some lenders offer more flexible mortgage terms, which can be beneficial for self-employed individuals with variable income.

• Look for offset mortgage options to reduce interest costs.
• Check if they allow overpayments without penalties.
• Explore options for interest-only periods if cash flow is tight.

Self-employed individuals can achieve homeownership with the right approach. While getting a mortgage may seem more complicated compared to salaried applicants, preparation and the right financial strategy can make a big difference.

Your employment status shouldn't stop you from owning your dream home. By being well-prepared and exploring the right avenues, you can secure a mortgage that suits your needs.

Need guidance? Speak to our experienced accountants who can help create professional accounts that lenders may prefer. Having solid financial documentation gives you a better chance of mortgage approval and helps you achieve your homeownership goals.

FAQs on Self Employed Home Loan

1. Do self-employed people have to pay higher mortgage rates?

Self-employed people don't always have to pay higher mortgage rates, but it depends on their financial situation and the lender's criteria. If you have a strong credit score, a steady income history, and a larger deposit, you can access competitive rates similar to those for salaried employees.

2. How long do you have to be self-employed to get a mortgage?

Most lenders prefer self-employed applicants to have at least two to three years of trading history, with tax returns (SA302s) and accounts to prove income. Some may consider applications with one year of accounts if the financial records are strong and show stable earnings.

3. What happens if I've got gaps in my work history?

Gaps in work history can make mortgage approval harder, as lenders prefer a stable income. However, if you can show a strong overall earnings record, savings, or a valid reason for the gaps—such as illness or a career break—some lenders may still consider your application.

4. I don't have any financial accounts yet. Can I still get a mortgage?

Getting a mortgage without financial accounts is difficult, as lenders need proof of income. If you’re newly self-employed, some lenders may accept bank statements, contracts, or projected earnings, but options will be limited.

5. Can I use shared ownership if I'm self-employed?

Yes, self-employed individuals can apply for shared ownership, as long as they meet the eligibility criteria. Shared ownership is available to those with a lower income and typically requires a minimum 5% deposit. Lenders will assess your income, so having a solid financial history, proof of income, and tax returns will help your application.

6. What counts as self-employment when applying for a mortgage?

Self-employment includes working for yourself as a sole trader, contractor, freelancer, or owning a business. If you own more than 20% of a business that pays your income, you are considered self-employed by lenders.

7. Do self-certification mortgages still exist?

Self-certification mortgages no longer exist in the UK. These were phased out after the 2008 financial crisis due to concerns about lending risks. Today, lenders require solid evidence of income, such as tax returns, business accounts, or payslips, to assess affordability and risk.

8. Can I get a joint mortgage with a self-employed worker?

Yes, you can get a joint mortgage with a self-employed partner. Lenders will assess both your and your partner’s financial situations, including income and credit history. As long as both applicants can show sufficient income and financial stability, a joint mortgage is possible.

9. What is the ideal loan-to-value ratio for self-employed mortgage applicants?

The ideal loan-to-value (LTV) ratio for self-employed mortgage applicants is typically around 75-80%. This means you would need a deposit of 20-25% of the property value. However, some lenders may accept higher LTVs, up to 90% or even 95%, though this often comes with higher interest rates or stricter criteria for self-employed individuals.