Being self-employed brings many different rewards and challenges to the table. Amongst the challenges is that of getting a mortgage.
Many people worry about how much harder it would be to get a mortgage if they are self-employed and it’s no surprise given the potential obstacles that can arise during this process.
So can self-employed people get a mortgage? And how can you improve your chances of getting the all important approval?
Hands up, we’re no mortgage experts! So we thought we better bring some in.
We’ve quizzed some of the UK’s best mortgage brokers and advisers and here we share top tips, advice and answers on how to get a mortgage if you’re self employed.
Self-Employed Mortgages - The Quick Version
Here’s a quick rundown of the most important points on the topic of mortgages for the self-employed:
- It’s more complicated to get a mortgage due to the potential unpredictability of your income
- You’ll need around 2 years worth of tax returns to successfully apply for a mortgage.
- It’s always best to keep your business and paperwork organised before applying.
Why is it more complicated for self-employed people to get mortgages than for employed people?
Getting a mortgage as a self-employed person can be hard for a range of different reasons. As we know, mortgage lenders need to be sure that any prospective buyer can pay back the mortgage, however, this is of course much more difficult to prove if you’re self-employed.
David Lee from Cambria Wealth Management says that:
“This is due to the unpredictability in income that running a business presents without the safety net of a basic wage offered by an employed role”. He added that “the self-employed are therefore required to prove a sustainable income over a longer period of time compared with that of an employed person which can be as little as one month in some cases”.
How many years of accounts/tax returns does a sole trader need to successfully apply for a mortgage?
There can sometimes be misconceptions surrounding how many years of accounts or tax returns self-employed people need in order to apply for a mortgage. Nicola Schutrups from The Mortgage Hut told us that:
“Most lenders will require two years full accounts for a mortgage and may take an average of the two years, or the latest year’s net profit figure for the purpose of affordability”.
Jane King from Ash Ridge agrees with this, but also adds that
“Some will consider 1 year if the business is robust or is a professional service such as solicitor or doctor.”
It seems that around 2 years of full accounts will usually suffice, but this may vary depending on the occupation of the self-employed individual.
If someone is a Director of their own limited company, does the company's performance get taken into account when applying for a mortgage?
To answer this, Rob Brookes from Mortgage Advice Bureau told us:
“Yes it does. The lender will check to confirm the director is not drawing dividends in excess of the level of profit the company is generating.
Essentially, they’re looking to see that income is sustainable”.
David Lee agrees with this, adding that:
“The company’s performance is a major factor in an underwriter’s decision to approve a loan because this provides an indication into the reliability of the income drawn, continuing at an acceptable level to fund the mortgage for years to come”.
What are the best things that self-employed people can do in order to increase their chances of successfully getting a mortgage?
There are a variety of different ways in which self-employed people can improve their chances of getting their mortgage application accepted.
Nicola advises you to:
“Plan ahead. It’s all well and good having an accountant who is a magician, however, just remember lenders will work on the profit that you disclose. Generally, no profit = no mortgage as it is difficult for them to prove you can afford it. So speak to a good broker who is happy to work with you and your accountant to make your accounts presentable to a lender”.
Jane adds that self-employed people should:
“Show an increasing income and an overall improving picture for their businesses for at least 2 years, and keep company borrowing and overdrafts to a minimum”.
It appears that many expert mortgage brokers agree that transparency and organisational skills are key factors in improving your chances of successfully getting approved for a mortgage. And if you’ve been working with your accountant to reduce your tax bill, just bear in mind that your declared profit is what’s going to matter.
How much can a self employed person borrow with a mortgage lender? Is there a way to estimate?
David advises that “due to the varying ways in which each lender assesses self-employed or company director income, I suggest that all the financials of the business is gathered, together with information on personal spending habits, existing liabilities and credit history, then book a meeting with an adviser to discuss the realistic possibilities of borrowing that can be made available”.
Jane says that “There are lender calculators online but they are not very accurate. It is best to speak with an Independent Adviser” with Rob agreeing with this by stating “ it is always best to get expert advice”.
It’s clear that a lot of the time, online calculators may not give an accurate answer, so getting help from an expert may be the best choice.
Although there are challenges when it comes to being self-employed and wanting to apply for a mortgage, there are a variety of things you can do to increase your chances of a successful mortgage application. Keeping all of your paperwork for the business organised and in order will provide the lender with all the information they need and stand you in good stead when it comes to your application.
We would like to thank the expert advisors who helped with putting this article together.