What mortgage can I get when self employed?

It's a common belief that as a self-employed professional, the odds are against you when it comes to obtaining a mortgage. While it's true that the process can be more complicated, it doesn't mean that you should rule out your chances.

To help you along, we've put together a comprehensive guide, gathering advice from industry experts both internally and externally.

We'll cover the following:

• What documents do I need to apply for a mortgage?
• How do lenders calculate my self-employed income?
• Commonly asked questions about self-employed mortgages
• What can I do to improve my chances of getting a mortgage?

You'll need to provide the following:

• 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: You'll be assessed on your net profit. 
• Partnerships: Lenders will look at your share of net profit. 
• Limited company: Lenders will look at your salary and dividend payments. 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 2017 net income was £60,000 and your 2018 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. 

Is it more expensive obtaining a mortgage when I'm self-employed?

Most lenders do not discriminate on this basis, so you should qualify for the same mortgage rates as an individual earning the same income in a full-time role-as long as you can prove your income. 

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."

Do I stand a chance with my mortgage application if I 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."

How will I be assessed if I have earnings that fluctuate?

As a self-employed person, it isn't uncommon for your income to fluctuate from month to month, or from one year to the next. Lenders will typically use an average of your income from the last three financial years. 

However, things can get complicated if you've experienced a fall in your income. T

hat's because your lender may be concerned about your earnings showing a declining trend—particularly if you've experienced a significant drop in your recent earnings. In this case, the lender may not take the average figure, but base affordability on your most recent income. 

Do I stand a chance of getting a mortgage if I have a bad credit score?

If you have a bad credit score, it doesn't mean that you stand no chances at getting your mortgage loan approved. 

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.

1. 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."

2. Think twice about switching your business structure prior to your application

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

If you're thinking about going from being a sole trader to a limited company director, it's best to delay your application until you have one 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. 

3. Avoid taking extended breaks prior to your mortgage application

Lenders want to see stability in your work flow and income, so it may be best to avoid taking extended breaks longer than six to eight weeks a year or two before you make your mortgage application. 

4. Prepare an updated CV 

This is especially important for contract workers, as lenders will want to know how long more of an existing contract you have remaining, or see evidence of a new contract or a steady flow of projects lined up.

As such, we'd suggest having an updated CV on hand for your mortgage application.

5. Consider mortgages that allow for over payments

As a self-employed individual, you'll likely experience peak periods that bring along a greater influx of funds.

It can be worth looking into mortgages that allow for over payments, since you'll be able to make over payments (above your monthly repayments) when you can afford to, and as such pay off your mortgage more quickly.

6. Ensure that your credit history is in good shape 

Having a pristine credit history will boost your chances of securing a mortgage and getting access to favourable rates.

Your lender may check both your personal and business credit history, so it's best that you keep a close eye on your credit reports regularly. At a minimum, you should be checking your credit reports once every year. 

If your credit score isn't yet where you want it to be, there are steps you can take to improve it before your mortgage application.

These include:

• Being timely with your bill payments
• Keeping your credit utilisation low
• Monitoring your credit reports regularly, and reporting any mistakes immediately
• Avoiding unnecessary credit applications (these can trigger a credit check, which can affect your credit score) 
  

7. 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. 

8. Obtain an agreement in principle

Having an agreement in principle can help speed up your home-buying process.

It's an indicator that your credit is in good shape, and conveys to your seller and estate agent that you're a serious buyer. 

9. Understand your finances

Make sure you understand your business finances, and are able to provide further details when asked to by your lender. 

If you've experienced a dip in your income or cash flow, make sure you're able to explain these fluctuations—such as why and how it happened, and what are the measures you'll implement should you experience cash flow issues or a fall in income in the future. 

Showing that you have a plausible reason, and that you're well-prepared to deal with similar circumstances down the road will increase your chances of securing a mortgage. 

10. Keep up-to-date records and accounts

Don't underestimate the importance of keeping good records.

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."