Updated: Oct 22, 2019
There are around 4.8 million self employed people in the UK. There is a great array of advice and the misconception that if you have irregular income or don't have three years worth of accounting that you are automatically unable to get a mortgage. There is also the idea that the self employed will be landed with higher interest rates which is simply untrue.
So what do you need to get a mortgage?
Here's our list of what lender will ask from you if you are self employed:
ID – Make sure you have valid photographic ID. If you present your driving licence, make sure it has your current address on it.
Proof of Address – A council tax, utility bill or financial statement will suffice.
Employer – You’ll need to gather three to six months’ payslips and P60s. If you’ve received extra income such as bonuses or commission, some lenders may require two years worth of P60s. Don't forget to also get your P11D.
Limited company accounts – If you’re a limited company director then the last two years’ worth of fully signed accounts (this normally needs to be signed off by a Chartered Accountant) is required in most cases, though some lenders will accept just one year’s accounts.
Personal Tax Returns – Self-employed workers need to request three years SA302s and a tax overview requested from HMRC.
Contractors – You’ll need the last 12 months of contracts, fully signed by all parties. These need to clearly show your day-rate and have been paid in sterling, with an expiry date ideally included on each contract. If you're contract does not have an expiry date a supporting letter from
Bank Statements – Three months’ salary fed bank statements, three months business bank statements and three months bank statements showing rental.
Deposit – You need to provide a statement showing funds held, and a build-up of funds. If a family member intends to support your mortgage with gifting funds, or to transfer money over to you there should be a paper trail to that effect.
Life insurance or other protection – Lenders will usually need to see evidence of any Life insurance you have in place to cover the mortgage - normally this means sending them a copy of the policy.
What can self-employed people do to improve their mortgage chances?
There are several other factors that also influence their decision here are a few things to have a look at.
Speak to a broker first – Not all lenders have the same criteria – a broker will ensure you are matched with the most suitable lender
Check your credit file – Ensure there aren’t any adverse entries against you, especially ones you’re not aware of. It is possible to put notes onto your credit file to 'explain' any adverse entries
Ensure you’re on the electoral roll – Check with your local council, this will help with the credit score
Make sure your accounts are all up to date – To achieve the most competitive rates you need to have an impeccable credit record, so make sure everything is paid on time.
Stay away from payday loans – Payday loans do not paint a good picture of your finances, and lenders will often read this as you being in financial difficulty. Many lenders will simply decline to lend if there is a recent record of payday loans. As a bare minimum keep the last year before you apply for a mortgage free of pay day loans.
Minimise credit checks for other insurance or credit applications – Multiples credit checks in a short space of time can reduce your overall credit score. This can give the impression that you are applying for lots of credit; being declined by other institutions.
Don’t allow your credit card to reach its limit – The higher the % usage of your credit card will result in a lower credit score. We’d suggest spreading outstanding balances across two cards, rather than having one on the limit. It can be common place for people paying off debt to reduce their credit limits as they pay off their outstanding credit card debt but this can actually harm you.
Sort your deposit early – If using business funds, speak to your accountant – Taking regular withdrawals can lead to a smoother underwriting rather than taking a large lump sum in one go. When taking a large lump sum the lender may ask the accountant to confirm this will not be detrimental to the business, causing an extra delay in the process
Get yourself an agreement in principle – Most estate agents won’t let you view the property, let alone make an offer without an agreement in principle. This will confirm the maximum loan to give you peace of mind that you are looking at properties within your budget. It’s also a good indication that your credit is in order.
So what can I afford?
Lenders will analyse earnings is by looking at the net profit of your business – whether you’re a sole trader or freelancer. If you’re set up as a limited company, a lender will look at your salary and dividends , or share of net profit. For contractors, your annualised day rate will be taken into consideration. It is important to consider that if you are contracting for clients outwit the UK that you make sure that payments are made to you in Sterling including non Sterling payments will cause complications and might mean you refused.
The amount you can borrow is often determined by an ‘affordability calculator’. Lenders will look at all sorts when deciding whether or not to give you a loan, including lifestyle spending, commitments, and dependants.
One problem newer business owners find is that lenders often average out your earnings between a two or three year period. For startups where you only took a 'proper' salary in your last year it might be worth focusing on lenders that require one years accounts.
For additional information or any question's don't hesitate to get in touch with us at firstname.lastname@example.org