For self-employed individuals, approaching the mortgage application process can present unique challenges, associated primarily with the variability of their income. Lenders often require detailed proof of stable income spanning 2 to 3 years to evaluate financial robustness, which may not always align with the income patterns inherent to self-employment.
However, obtaining a mortgage as a self-employed professional is entirely feasible. To enhance the likelihood of success, it is advisable to prepare comprehensive documentation and evidence of your capacity to adhere to repayment commitments, despite sporadic income. Consulting with a mortgage advisor, especially one with proficiency in tricky self-employed cases, can significantly streamline this process and avoid back and forth during the underwriting stage.
How do mortgage lenders determine if you are self-employed?
In assessing applications from self-employed individuals, lenders will put you in the ‘self-employed’ category if you're a sole trader, a company director, or a contractor holding a significant share—typically 20% to 25%—of the business providing your primary income. In essence, if your financial affairs necessitate the submission of any form of tax return, either personally or on behalf of your enterprise, lenders will classify you under the self-employed category. Critical considerations for lenders in these instances include the duration of your self-employment, the stability and manner of your income, and the proportion of business ownership.
Can self-employed professionals get a mortgage?
Securing a mortgage might pose additional challenges for self-employed professionals, given you have to verify income across an extended timeline compared to salaried employees. The demise of ‘self-certified’ mortgages, following instances of misuse and higher default ratios, exacerbated these challenges. Modern lending criteria require self-employed applicants to substantiate their earnings through specific documents over 2 to 3 years, mirroring the scrutiny applied to employed applicants but over a more extended period. This shift acknowledges the perception of risk by lenders of self-employed earnings, and aims to obtain comfort by assessing declared income over years rather than months.
How to get a mortgage as a self-employed person?
While the application pathway for self-employed and contractor mortgages mirrors that of regular employment to some extent, the necessity for additional documentation over a longer period underscores factors affecting affordability for lenders. Working alongside a mortgage broker, well-versed in the intricacies of self-employed applications, can alleviate much of the administrative burden.
Essential documents often include the following:
- company trading accounts
- personal tax calculations from self-assessment (also known as ‘SA302’ forms)
- business and personal bank statements (typically over 3 – 6 months)
Meticulous preparation and presentation of these documents are pivotal in affirming your financial resilience and optimising your prospects of mortgage approval. It is also advisable to prepare your accountant as the lender may want to seek further assurance directly from them to verify aspects of income, or projections for future income.
How is self-employed income calculated for mortgages in the UK?
Navigating the mortgage application process in the UK as a self-employed individual can seem daunting, but understanding how your income is assessed based on your business type is a great first step. Whether you're a sole trader, a limited company director, or a contractor, we're here to guide you with clarity and expertise.
For sole traders, the focus is on your revenue minus any business expenses. Lenders typically look at an average of this figure over the last 2-3 tax years. If your income has decreased in more recent years, be prepared to explain why. This approach ensures a fair assessment of your financial health.
If you're a director of a limited company, the calculation takes into account both your salary and any dividends you've received, providing a comprehensive view of your earnings. In some cases, lenders might also consider the company's operating profit alongside your salary. As with sole traders, they'll average this over 2-3 years, paying close attention to any fluctuations.
Contractors will find that their income is evaluated based on their current contract rate and its duration, typically projected over 46 to 48 weeks to account for the unique nature of their work. This can be assessed over a shorter period, such as the last three months, offering a flexible approach to those with varying contract lengths (for more detailed information, refer to our ‘Guide to Getting a Contractor Mortgage’).
The documentation required plays a pivotal role in painting a clear picture of your financial situation. Early advice and preparation will ensure you are not asked for documents that you either cannot produce, or they paint a bleak picture of your affordability.
How many months’ bank statements are required for the mortgage application when self-employed?
When evaluating mortgage applications for self-employed individuals, lenders often request bank statements to assess financial stability. The number of statements required varies based on the perceived risk associated with the loan.
For instance, a smaller deposit might be seen as higher risk, necessitating up to 6 months of bank statements for deposits less than 15%. Typically, however, lenders ask for 3 months of statements to gain a clear picture of your financial health.
For applications deemed low risk, characterised by strong affordability and a substantial deposit or equity (over 25% for remortgages), lenders may not require any bank statements. This approach means the burden of paperwork is based upon the perceived risk to the lender. The key for the applicant is gauging what will be needed, which is where the specialist mortgage advice become key.
For sole traders and limited company owners, each business is unique, but lenders want a consistent approach in assessing these businesses. Recognising this, Cleerly work with lenders who are willing to consider applications with as little as one year of trading history, although it is more common for lenders to require two to three years. For self-employed contractors, Cleerly’s mortgage experience allows the Mortgage Consultant to source opportunities where as little as three months of history may suffice, provided it aligns with specific lending policies and risk appetite.
Can self-employed first-time buyers get a mortgage?
Yes, self-employed professionals are indeed eligible for first-time buyer mortgages. However, the process may require extra steps due to the perceived higher risk by lenders. Unlike employed professionals, self-employed income is assessed over a longer timeframe, and without a previous mortgage history, lenders may conduct a more thorough review. This is where the expertise of a dedicated adviser becomes invaluable. A specialist broker, like Cleerly, understands these unique challenges and prepares you in advance for the questions lenders will ask and the documents needed. This proactive approach minimises stress due to unforeseen information requests and streamlines the process, especially during the critical stages of purchasing a property.
What sort of mortgages can a self-employed professional apply for?
Cleerly can ensure self-employed professionals have access to all types of mortgages that are available to employed applicants. These include the following:
Fixed-rate mortgages: you will pay interest at the same rate over a set period of time, typically over 2, 3 or 5 years; although longer term fixed rates are also available.
Tracker mortgages: these mortgages follow the Bank of England base rate at a set margin for a period of time, so they are a type of ‘variable’ mortgage that can go up or down. They do not give you a stable payment lie fixed-rate mortgages.
Discounted mortgages: this is another type of variable-rate mortgage, but rather than tracking the Bank of England base rate you will track the lender’s ‘Standard Variable Rate’ (see below). Like with tracker mortgages, the ‘discount’ is usually for a set period of time before it expires.
Standard Variable Rate (SVR) mortgages: every lender has a standard rate which does not have any special benefit applied to it. It is also the rate that the mortgage will revert to after expiry of an initial special deal, such as a fixed or tracker mortgage. The vast majority of borrowers do not apply for SVR mortgages, but can fall onto them if they do nothing about their initial deal expiring.
Are you self-employed and struggling to get a mortgage?
There may be additional questions you may have as a self-employed professional seeking a new mortgage. If you have specific questions or concerns about being self-employed and your ability to get a mortgage, Cleerly’s team of specialist mortgage consultants are on hand to help you navigate the self-employed mortgage application process.