Applying for a mortgage when you’re self-employed

It can be challenging to get a mortgage when you’re self-employed but it is possible. There are ways to increase the likelihood that a lender will accept your application and we’ll detail those here for you.

The mortgages available to self-employed applicants

You have access to the same mortgages as buyers who are employed but have to meet stricter lending criteria. This is because your income is likely to fluctuate and you’re considered to be a higher risk for the lender. You need to provide proof that you can afford the monthly repayments before they’ll agree to give you a mortgage. Whilst this is more complicated than it is for an employed buyer, the more paperwork you can provide, the better your chances of being approved for a mortgage.

The lending criteria

Usually, you’re required to provide 2 or 3 years of certified accounts. Don’t be disheartened if you only have 1 year of accounts as some lenders will accept this along with a projection. You also need to provide SA302 forms for the last 2 or 3 years or a tax overview from HMRC. As with your accounts, some lenders will accept an SA302 form for 1 year although your mortgage options may be limited in both cases.

Lenders generally average out your earnings over the last 2 to 3 years. When the lender can see that you’re making a consistent profit each year or that the profit is increasing, this goes in favour of your application. If your income varies dramatically each year, however, you may need to provide proof of potential income for the future or proof of savings.

How you are assessed

Lenders class you as being self-employed if you own 20 to 25% or more of a business. This could be as a sole trader, when belonging to a partnership or as a limited company director. Each of these three categories is assessed differently.

Sole trader

As a sole trader, you need to submit a self-assessment form before requesting an SA302 form, which details your annual income and tax calculations. The majority of lenders ask for three of these although some will agree to just two.

Your lender will determine the amount you can borrow based on your net profit after all deductions and expenses. Your net profit is the figure the tax is calculated on. For example, your business in Bexley may have a gross profit of £100,000. After the salaries and other costs have been deducted, you may be left with a net profit of £20,000. This is the figure your lender is interested in.

Partnership

When you are in a partnership, your share of the profits is taken into account by the lender. Again, this is your share of the net profit once all of the deductions have been made, not the gross profit.

Limited company

With a limited company, the salary you pay yourself as a director and the dividend payments are usually taken into account by your lender. Some lenders consider your director’s salary and the retained profit in the business rather than the dividends. If the retained profit is higher, this can increase your borrowing potential.

Increase your chances of approval

There are several ways you can improve your chances of being accepted for a mortgage.

Save more for your deposit

The more you can save for your deposit, the more willing lenders will be to offer you a mortgage. This is particularly the case if you don’t have an extensive record of accounts. As well as that, the higher the amount you can pay as a deposit, the better the mortgage rates will be.

Check your credit rating

Apply for a copy of your credit report from one of the main credit reference agencies – Experian, TransUnion and Equifax – and check that all of the information is correct. If not, contact the credit reference agencies to rectify this as quickly as possible. A good credit rating is looked on favourably by lenders and there are various ways you can boost your credit score:

• Register on the electoral roll.
• Control your spending. Close any accounts you don’t use, such as home shopping accounts, and cancel any regular outgoings you don’t need to make, such as a gym membership in Bexleyheath that you don’t make full use of or a magazine subscription that you don’t really need.
• Pay your bills on time. Late or missed payments negatively affect your credit score.
• Don’t reach the limit on your credit card. The higher the percentage used on your credit card, the lower your credit score becomes. It’s better to have more than one card with the balance spread across them rather than one card with a high percentage.

Avoid payday loans

From a lender’s point of view, taking out a payday loan shows that you are struggling financially. Many will decline your mortgage application if you have recently had a payday loan. It also harms your credit rating.

Use an accountant

Ensure your accounts are prepared by a chartered or certified accountant. Many lenders actually insist that the accounts for self-employed applicants are signed off by a qualified accountant.

Speak with a mortgage broker

Lenders have different criteria and your mortgage broker in Kent, London or Edinburgh will know the best lender to approach for your circumstances. If you go it alone and apply for a mortgage and are then rejected by the lender, this negatively affects your credit file. Other lenders will then be less likely to accept you for a mortgage.