Self-Employed Mortgages

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Self-Employed Mortgages (Part 1)

Simon talks to us about mortgages for the self-employed.

Podcast approved by The Openwork Partnership on 12/09/2024.

Is it hard to get a mortgage if you are self-employed?

If we’re comparing getting a mortgage when self-employed compared to when employed, then yes, unfortunately, it is harder in some ways. It’s more complex in the things you’d have to provide.

There’s a lot more information and history you’d have to evidence, which is the biggest difference when it comes to meeting lender’s criteria.

What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed?

As a self-employed individual, you’d still be looking at a standard mortgage application. The type of mortgage is the same whether you’re employed or self-employed. Unfortunately, some lenders do restrict the borrowing slightly for self-employed applications, and might require a minimum deposit of 10%.

They may also limit the salary multiples, regardless of the deposit amount. But the good news is there are other options available if you’re self-employed, and you could use a 5% deposit where standard criteria would apply.

How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year of self-employment?

The general rule list is two years minimum as self-employed. This is what almost all lenders would want to see. They want to make a judgement on the consistency of the self-employed income you’re receiving over a longer period than one year.

My most recent years earnings were less than my average. Will this affect my mortgage application?

Unfortunately, yes, it will likely have an impact. Lenders will look at your two most recent years of self-employed income, and if that income has increased year on year, they’ll usually take an average of the two to base affordability calculations on. Ultimately, what they’re determining is your income.

If your latest year is lower and not representative of your average earnings, they will take this figure only and not an average. A lot of self-employed individuals understandably find this quite frustrating.

The most recent year might be very out of sorts versus their normal income, but this is unfortunately what the lender is going to be looking at, regardless of whether we can evidence different earnings over a longer time.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage as someone who is self-employed?

The majority of the time, affordability calculations are made in the same way as for an employed individual. The income calculated from the two most recent tax years will determine how much you could borrow. Different levels of income and deposit will unlock higher salary multiples.

A handful of lenders, regardless of the income or deposit for a self-employed application, will restrict the borrowing to their minimum amount of 4.5 times income.

As a mortgage broker, we’re here to match your circumstances and plans with the lender to achieve your goals.

What mortgage deposit do I need if I’m self-employed?

Unfortunately, there are some lenders that do require a minimum level of deposit for self-employed applications, usually at 10% plus. But this is more of an anomaly than the rule. A good number of lenders would accept an application with as low as 5% deposit for a self-employed individual.

How will you be assessed as a self-employed mortgage applicant?

The majority of your mortgage application will be assessed in the standard way. Credit scoring is the same for an employed or self-employed individual. The key difference is just what they’re looking at in order to calculate your income.

For an employed individual, lenders usually just use the latest three months’ pay slips. But as a self-employed individual, we’d be looking back at two years’ worth of self-employed income. But once that figure is calculated and known, the rest of the application would just be treated in a similar way.

How will a lender calculate my self-employed mortgage earnings?

They use the two most recent years of your tax returns and take an average of those if that figure has increased year on year. If that figure has reduced in the most recent year, they’ll just use that latest year’s figure as your income.

How do I prove my income? What documents do I need to apply for a self-employed mortgage?

You will evidence the income you’re earning with your SA302 tax calculations, tax year overviews, and potentially your company accounts.

They’re the three things that you normally need to provide. Some lenders may need accountant certificates, but it’s not something unnecessary I suggest we get into. They’re the main three things that you would need to think about.

You may not have those to hand, but most of them are downloadable from the HMRC website, and they would be what the lender would need to see.

What else do we need to know before we return for Part Two?

The only thing that I would add is that a discussion with a mortgage advisor early is a good idea, to understand where you stand and where you might need to be before making a mortgage application.

There’s quite a key difference between employed and self-employed individuals, with the history and evidence you have to provide. Understanding what you might need and how far back we might need to look allows you to make personal plans with the view of purchasing property.

We’re here to provide guidance on that – so speak to a mortgage broker as early as possible and we’ll be more than happy to help.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Approved by The Openwork Partnership on 12/09/2024.

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Self-Employed Mortgages (Part 2)

We continue the conversation on getting a mortgage if you are self-employed with Simon Hart. Episode two of two, recorded in November 2024.

Podcast approved by The Openwork Partnership on 12/12/2024.

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

Fortunately, no. The type of income and employment status on an application, be that employed, self-employed, a contractor or or otherwise, doesn’t influence the interest rates you can access.

Interest rates are typically determined by the level of or the percentage of deposit that you’re putting down, otherwise known as Loan to Value.

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

Yes, you can. If you’re employed and taking a joint mortgage with an individual who’s self-employed, your incomes are assessed differently. For an employed individual, income will be verified through pay slips, bank statements and other standard documents.

For the person who’s self-employed, the lender will review the income based on tax returns, and possibly company accounts, usually spanning the past two years.

The key things lenders look at on a joint mortgage with a self-employed individual is the overall affordability – and therefore your combined ability to meet mortgage payments. That’s regardless of self-employment status.

I’ve recently gone from being employed to self-employed. How soon until I can get a mortgage?

This is the ultimate question – the one we’re asked most often by self-employed individuals. A handful of lenders look at just one year of working as self-employed. But typically, we’d need to see two years’ history and two years’ worth of tax returns to use self-employed income on an application.

Can I use shared ownership if I’m self-employed?

Yes, you can buy a shared ownership property if you’re self-employed. The process is similar to a standard, full ownership property purchase, with lenders assessing your affordability based on your income.

If you are self-employed, this typically involves providing your tax returns, accounts and bank statements, as with any residential purchase. While the criteria may vary between lenders, as long as you demonstrate your ability to meet mortgage payments, you should be eligible for both a shared ownership purchase or a full ownership purchase.

How does remortgaging work if I’m self-employed?

There are no particular differences. Your self-employed income would be assessed in exactly the same way as if you were purchasing. The only thing to remember, as I mentioned, is the period of time you need to have been working in this way.

As an example, we’ll sometimes speak to clients who were employed when they initially purchased a property, and when the remortgage comes around they’ve gone self-employed. Perhaps there isn’t enough history of working in this way to make the new remortgage application.

It’s not the end of the world. There are options available – but it’s just an example where, if you’re thinking of making this change, it’s a good idea to have a conversation as early as possible with a mortgage broker. We’ll discuss what your options might be and the potential implications on your remortgage.

Will being self-employed with bad credit affect my mortgage deposit?

The self-employed nature of the application won’t influence this. But yes, quite possibly if you have some credit issues, lenders may require a slightly higher deposit at the point of application.

Your income is assessed in the normal way, regardless, but because of the credit history, lenders might require a higher deposit – because from their perspective, there may be a greater risk.

How can I get a mortgage as the director of a limited company?

If you’re working as a sole trader, lenders will look at your profit from self-employment, averaged over the last two years. For a director of a limited company, lenders can look at your income in a number of different ways.

Most typically, they will look at the salary and dividends paid to you, again over the past two years, taking an average if this has increased in the most recent year. A few lenders can also look at the net profits of the business as ultimately this is money that you have earned – you’ve just chosen not to withdraw all of it from the business.

For this, lenders would look at net profits post-tax, plus the salary paid to the director, again averaged over two years.

If you’re a company director, but you’ve got a relatively low percentage share in the business, say somewhere between 20 or 25% or less, lenders might simply treat you as employed. They would look at salary and any bonuses you receive.

The required documents are very similar to the employed – they will look at your pay slips to determine the income you’re paid.

What can I do to help my chances of getting a mortgage as someone who is self-employed?

Compared with employed applicants, the biggest difference is the track record you have to provide when you’re self-employed.

If you’re employed, you can often secure borrowing if you’ve only very recently started a job, or in some cases, some lenders will offer you a mortgage based on a role you haven’t even begun yet.

Whereas if you’re self-employed, you need up to two years worth of experience and evidence to apply for a mortgage. Understanding what is required from you as early as possible in the process is really important.

It helps you align your purchase or remortgage expectations with what the lenders need to see. When the time comes to do something, that will ensure a successful outcome for you.

How can a mortgage broker help me with my self-employed mortgage application?

As a broker, it’s our job to know which lender might be a right fit for you, based on your income and personal circumstances. Each lender has very different criteria and will require certain documents and evidence for an application to be successful.

A broker can explain exactly what’s needed, which saves you time and effort – and also improves your chances of approval when the time comes.