Are you planning to buy a house as a self-employed professional? If so, this article sheds light on lender perspectives and key documentation. Read on to learn all about the house-buying process.
Gain insights into related areas like buying a house at an auction and how to save for a house deposit.
What is a self-employed mortgage?
A 'self-employed mortgage' refers to a financial product designed for those who don't receive regular pay through traditional employment. Instead, they earn through freelancing, running a business, or working as a contractor.
Mortgage lenders often view these applicants differently due to the nature of their income and the documents they present.
How do most lenders perceive self-employed borrowers?
Banks and building societies approach self-employed applicants with caution. To lenders, stability and predictability matter, and traditionally, self-employed individuals might appear as higher risks due to fluctuating incomes.
Most lenders, however, have tailored processes to assess self-employed applicants, recognising that their financial profiles differ from salaried workers.
Misconceptions surrounding self-employed mortgages
Many believe that the self employed mortgage criteria are different and that securing a mortgage as self-employed is an uphill task. The process can indeed be different, but it's far from impossible. You will be able to qualify for the same mortgage rates as anyone who is a permanent, full-time employee.
One common myth is that self-employed borrowers always pay higher mortgage rates. While some may face higher interest rates due to factors like credit score or inconsistent income, many lenders offer competitive mortgage products to suitable self-employed applicants.
Another misconception is that a long track record of self-employment is needed. In reality, lenders usually require one year's worth of company accounts or a tax return.
Eligibility and assessment for self-employed mortgages
Can you secure a mortgage if you're self-employed?
Absolutely, the self-employed can secure a mortgage. However, lenders might scrutinise the application a bit more closely than those from traditionally employed applicants.
The main aim of a mortgage lender is to be confident that the applicant has a reliable income to cover monthly repayments.
Types of self-employed income: sole trader, limited company, and more
Sole trader income assessment: sole traders derive their income directly from business profits. When applying for a mortgage, bank statements and tax return details will serve as evidence of your income. Lenders will typically look at your net profit as your primary income.
Limited company director's dividend payments and retained profits: for company directors, income might be a mix of salary and dividends. Mortgage lenders often consider both, but they'll also examine profits retained within the company.
It's advisable to have clear documentation, ideally prepared by a qualified accountant, showing a breakdown of your earnings.
Other self-employed people and their primary income sources: Apart from sole traders and company directors, other self-employed categories include individuals in a limited liability partnership or those with a main income from rental properties.
Just like the aforementioned types, clarity in earnings documentation is key. It's not just about what you earn, but also how consistent and sustainable that income appears to mortgage companies.
Factors lenders evaluate for self-employed applicants
Let's look at the self employed mortgage requirements:
Duration of self-employment
The length of time you've been self-employed plays a significant role.
Ideally, a history of three years or more can be advantageous. But some lenders might accept less, particularly if you can demonstrate growth and stability in your business.
Net profit and business accounts
Lenders pay attention to the net profit. If you're showing a consistent rise in profits year-on-year, that's a positive sign.
However, if you've chosen to reinvest profits back into the business leading to less taxable income, it could be viewed less favourably as it reduces the income figure used for assessing affordability.
Employment status and history
A varied employment history, moving between employed and self-employed roles, might raise questions for a lender. They'll want reassurance that you have a history of consistent earnings, regardless of the structure.
However, if you've transitioned from an employed role in the same sector to being self-employed, this can be perceived positively as it demonstrates industry experience.
Documentation essentials for self-employed mortgage applications
Lenders often request a few more documents with your self employed mortgage application to gauge your financial health. Let's see what you'll need.
General mortgage application documents
When aiming to get a mortgage, every applicant, irrespective of their employment status, typically submits:
Proof of identity: a valid passport or driving license.
Proof of address: utility bills or council tax letters from the last three months.
Evidence of deposit: savings statements or a gift deposit declaration.
Last three months' bank statements: lenders assess spending habits through these documents.
Proof of income: payslips for employed individuals; but the self-employed will need more.
While the above serves as a foundation, self-employed hopefuls often need a few additional pieces of documentation.
Additional paperwork for the self-employed
The world of self-employed mortgages might feel a tad intricate, but with the right paperwork, the journey becomes smoother. Let's take a closer look.
Tax calculations and tax year overview
Lenders ask for tax calculations from the previous two or three years. These documents, formerly known as SA302s, detail your annual income as reported to HMRC.
You'll also provide tax year overviews which confirm the amount of tax you've paid.
HMRC online account and qualified accountant validations
You can retrieve your tax calculations and tax year overviews from your HMRC online account.
If you have a certified accountant, they can also supply these figures.
Some lenders may prefer, or even require, an accountant's validation, ensuring the provided information is genuine and credible.
Upcoming contracts and accounts
If you're a contractor, lenders may ask about your upcoming contracts as evidence of continued income.
If you operate a limited company, lenders might want to see financial statements. These documents show your company's financial health, shedding light on retained profits and dividend payments.
Preparing a comprehensive document set can pave the way for a smoother mortgage application process. Each lender's requirements might vary, so it's wise to seek clarity early on.
Do self-employed people face different mortgage rates?
For a self-employed individual, borrowing rates mirror those of salaried applicants. Self-employed mortgages often bear the misconception of differing interest rates. Mortgage products determine the rate, not employment status.
However, if your credit score isn't stellar or your documentation isn't robust, you might find yourself facing higher interest rates. You might want to read our more detailed article on how to improve your credit score.
Just as with any other buyer, shopping around is your best tactic. Speak to multiple lenders and even consider specialist lenders who might have products tailored for the self-employed.
Boosting your mortgage prospects as a self-employed individual
Elevating your mortgage prospects isn't solely about numbers on paper; it's about taking actionable steps to appear favourable in a lender's eyes.
Engaging with a qualified mortgage broker
You're an expert in your field, but mortgage brokers are the connoisseurs of the mortgage realm. Engage with one, especially those experienced in self-employed cases. They can not only help you get a mortgage but also guide you towards lenders more inclined to approve your application.
Organise your finances and monitor your credit file
Pristine finances make for smoother sailing in the mortgage world. Ensure all your records are up to date and easily accessible.
Regular outgoings, credit card repayments, and household bills
Being meticulous about your regular payments, be it credit card bills or household utilities, paints a reliable financial picture. Lenders look favourably upon those who manage their finances efficiently.
Maintaining a decent deposit and eyeing a good deal
A bigger deposit often translates to better mortgage deals. Save diligently, and it might end up reducing the interest rate you're offered.
Being on the electoral roll and ensuring you have a favourable credit check can make a significant difference.
Seek expert advice and select suitable mortgage types
It can be tempting to apply for a mortgage with the first lender you encounter. But it pays to be selective. Gather expert advice, assess the pros and cons of various mortgage products, and choose one that fits snugly into your financial landscape.
Overcoming challenges and FAQs
Impact of government aids like SEISS grants on mortgage eligibility
SEISS (Self-Employment Income Support Scheme) grants aim to support those whose income has been affected by economic disruptions. When you apply for a mortgage, lenders may view SEISS grants as a temporary source of income.
Discuss SEISS income with lenders upfront. Some may exclude it from calculations, while others might be more accommodating.
Considering foreign self-employed income
For those earning overseas, UK lenders differ in their approach. Some lenders accept foreign self-employed income, but they may want it converted into GBP using an approved exchange rate.
Keep detailed income records. Having a UK-based accountant can make the process smoother.
What if one lender rejects? Exploring specialist lenders
A rejection from one lender isn't the end of your home-buying dream. While high street banks have more stringent criteria, specialist lenders cater specifically to non-traditional employment paths.
After an initial setback, consider a specialist lender who understands the self-employed segment better.
Tips for first-time self-employed home buyers
Stay updated with changing lending criteria: the mortgage market is dynamic, and lending criteria can shift. As a self-employed individual, keeping abreast of these changes can position you favourably when you get a mortgage.
Engage with a building society for alternative mortgage solutions: building societies sometimes offer more flexible mortgage solutions than traditional banks. Engaging with them might present tailored options, especially if your business accounts show less tax. Their community-oriented approach can provide personalised mortgage advice.