Can I get a mortgage if I’m self-employed?
You can get a mortgage if you’re self-employed. However, you will need to go through some extra steps. In this guide, Latest Deals has broken down these steps to show you how to get a mortgage if you’re self-employed, and how to boost the chance of your application being successful.
What is a self-employed mortgage?
If you’re self-employed and applying for a mortgage, you can access the same selection of options you’d have if you were employed in the traditional sense.
There are no specific mortgages that are just for the self-employed.
The difference is that lenders need to know you have a reliable source of income, as their first priority is your ability to repay your mortgage.
When you have a salary from an employer this can be easier to prove, but, as Latest Deals will explain in this article, you can do this if you’re self-employed too.
Applying for a mortgage can be a complicated process, so it’s helpful to follow the steps below carefully, and fully prepare your application before moving forward, to give it the best chance of success.
Things to think about before applying for a self-employed mortgage
Are you self-employed?
You first need to ask yourself if you’re self-employed in the way mortgage lenders define it.
Usually, this means that if you’re applying for a mortgage as a self-employed person, you need to own at least 20-25% of a business. This business should be the main source of your income.
For sole traders, you and your business are legally one, so the business will be your main source of income.
Don’t worry about whether you are in partnership or are a small-trader, you will be treated the same.
How long do you need to be self-employed to apply for a mortgage?
When you apply for a mortgage, lenders need to know that you will be able to repay them, so you’ll need to provide evidence of a reliable income.
To achieve this, most lenders require at least two years’ worth of accounts. Lenders may also need to see specifics on income, expenses and costs. They may ask for your bank statements.
This is so they can check you have a reliable income, and will be able to afford repayments, both now and in the future.
Can you still get a self-certification mortgage?
No, self-certification mortgages no longer exist.
This type of mortgage was designed for people who are self-employed, and allowed them to state their income to lenders, without providing any proof.
These ‘self-cert’ mortgages were banned in 2011, as self-employed borrowers were taking out mortgages that they couldn’t afford to keep up with.
Now, self-employed borrowers must apply for mortgages in the traditional sense, in the same way as people who are ‘employed’.
Where can you find a self-employed mortgage?
You can get a mortgage from a bank or building society.
If you’re self-employed, you have access to the same mortgages as those employed in the traditional sense, you just have to go through some extra steps which Latest Deals has detailed below.
Is it hard to get a self-employed mortgage?
In general, the mortgage application is complicated, and being self-employed can make things more challenging.
You have access to all the mortgages on the market, so it’s a case of building your application, making sure you include all the necessary information and documents, and taking steps to boost your chances.
Do the self-employed have to pay higher mortgage interest rates?
If you’re willing to provide all the necessary information about your income, being self-employed shouldn’t mean you need to pay a higher mortgage interest rate.
If your application is complete with the necessary information to reassure lenders that you can repay the loan, you should qualify for the same rates as someone of a similar income who is employed in a permanent, contracted job.
The mortgage rate you’re offered will depend on your down payment and credit score, as well as your history of accounts, rather than whether or not you’re self-employed. However, some lenders do have a different criteria for self-employed, such as requiring larger deposits.
This is why it’s important to save a deposit and achieve a high credit rating before thinking about applying for a mortgage.
What do you need to provide for a self-employed mortgage?
If you’re self-employed, in most cases you will need to provide certain information to prove that you have a reliable income and can afford to pay back the lender.
- At least two years worth of company / sole trader accounts
- Personal bank statements of the last 6 months or more
- SA302 form or a tax year review from HM Revenue & Customs for the last two or three years
- Evidence of any upcoming contracted work if you’re a contractor
- For company directors: proof of any dividends or retained profits
IMPORTANT NOTE - You will need to provide at least two years worth of income accounts that have been registered with HMRC. This relates to your tax year. It is not the last two years from today. It is the last two years of registered accounts.
This is important because your mortgage application is based on the numbers in the previous year’s registered accounts - not your present day earnings. If your income is higher today than it was in your last tax year (your last registered accounts), you may still not be able to get a larger mortgage until the following year.
It can be complicated compiling all of this information for your application.
Often, lenders prefer if the information is gathered by a chartered accountant.
By using a professional, lenders can be more confident in the reliability of the accounts, which may increase your application’s chance of success.
If you have an accountant, an additional step may be to get them to sign a letter alongside your accounts.
- Driving licence
- Council tax bill
- The last 3 months’ utility bills
- At least the last 6 months’ bank statements
Lenders will want to know your spending habits so they can assess whether you’ll be able to afford the mortgage repayments.
It will also increase your chances if you have a good deposit saved, and a good credit history.
What if you only have one year of accounts or less?
It may be harder to convince a lender that you will be able to repay a mortgage if you can only provide one year of accounts, or even less than that.
However, it’s not impossible. You can improve your chances of getting accepted if you can provide evidence of any regular work you have, or any future commissions.
If you’re a contractor operating as a small trader, you can use the government’s Contractor Industry Scheme (CIS). This helps contractors apply for mortgages with at least 6 months worth of income accounts.
Do you need a deposit for a self-employed mortgage?
Yes, you normally need a deposit for every mortgage.
Saving a deposit will improve your application’s chance of success.
Depending on your case and the information you give the lender, there may be some flexibility on the size of your deposit. A professional mortgage advisor can help you know what mortgages may be available to you.
When the market is going through a tricky time, some banks may ask for a higher deposit. For example, Santander currently wants self-employed borrowers to have a minimum 40% deposit (The Times Money Mentor), so it’s vital to save all you can. In general, you might need a deposit of at least 15% to reassure lenders that you can afford the mortgage.
Can you get a self-employed mortgage with poor credit?
If you’re ready to apply for a mortgage and you have a poor credit score, it can be difficult to be accepted by lenders.
If your mortgage application is accepted, you will likely have to pay higher interest rates. This is to cover the lender if you can’t make the repayments.
Read our guide on how to improve your credit score.
Once you have repaid some of the loan, you may be able to remortgage.
Always speak with a professional mortgage advisor before taking out a mortgage. You should never get a mortgage in which you may struggle to repay. You may end up in a worse debt situation.
How is a self-employed mortgage calculated?
Your mortgage will be calculated by the lender, and this is why it’s important to compare rates, and shop around to find the best mortgage deal for you. A mortgage advisor can help with this.
It’s important to note that there is a lot of variation in this, as some lenders will base their calculations on the last year’s figures, and others will take an average of the last few years.
Usually, lenders will calculate your mortgage depending on how you’re self-employed, and they’ll look at your income to do so.
Lenders need to be confident that you’ll be able to pay back what you borrow, both now and in the future.
If you’re self-employed, usually you’ll need at least 2 years’ worth of income accounts. You’ll also need to show 3 months worth of bank statements.
Sole traders will need at least a year’s worth of income accounts. Usually, if you have a longer trading history, lenders will look at the past three years.
Lenders will look at your net profits, so the higher they are, the better, as you’ll be able to borrow more money for your mortgage.
Sometimes sole traders declare less net profit to reduce the tax they have to pay. This can be a problem when lenders come to assess your income. If you find yourself in this situation, find a lender that will look at your total income, rather than just the net profits.
If you are a partner in a business, you’ll follow a similar path to someone who is self-employed. But, lenders will look at your share of the net profits when considering your application.
If you’re a director of a limited company, technically you are an employee of your own business, and so you’ll still face the same issues as a self-employed borrower.
Even though you own the company, you could still have an irregular income, and it may comprise a mixture of a salary that you pay yourself, and dividend payments.
As with a self-employed borrower, you will usually need to provide at least 2 years’ worth of company accounts to show that you earn consistently, and lenders will look at both your salary and dividend payments.
If you work through a limited company and also do freelance work, specialist lenders may be able to help you. Usually they’ll look at your weekly rate and times this by either 46 or 48 to get an idea of your yearly income.
If you have a real blend of how you’re self-employed, there are specialist lenders that will take into account PAYE earnings that you may get from freelance work, and self-employed earnings.
NOTE: This is when it can be trickier to get a mortgage if you’re self-employed. Lenders need to determine how much you can borrow. However, there are steps you can take to boost your chances of being successful with your application which are detailed below.
How to apply for a self-employed mortgage
When you’re self-employed and you apply for a mortgage, you should have access to the same mortgage rates and offers as someone with a similar income to yours who is employed in the traditional sense. So, you can get a mortgage from a bank or building society.
How to find the best deals on self-employed mortgages?
Before deciding on a mortgage, it’s important to shop around and find the one that is best for you and your circumstances.
How can you improve your chances of getting your self-employed mortgage accepted?
Once you have applied for a mortgage, you can’t change or add information to your application. So, before approaching lenders, you need to ensure your application is as complete as possible. There are some steps you can take to achieve this:
If you’re self-employed and you’re applying for a mortgage, having a substantial deposit will improve your chances of success.
Not only this, but you’ll also have more mortgages available to you, and be able to get a better rate.
A recommended deposit is between 10 and 40%, so if you want to maximise your chances of being accepted, aim for the top end of this.
First time home buyers between the ages of 18 and 39 can take out a Lifetime ISA (LISA). If you save up to £4,000 within a LISA in a tax year, the government will offer a 25% bonus that you can use to purchase a home. You can read more about Lifetime ISA accounts here.
Other methods of saving include sticking to a tight budget, making cut backs, increasing your work hours and so on. Latest Deals has a guide about how to budget your money.
Your credit score serves as an indication of reliability when it comes to paying back money. Lenders can use your credit history to decide whether offering you a mortgage is risky.
So, the higher your credit score, the more chance you have of being accepted. This is because it shows a good track record of you paying your debts.
Credit scoring outlines your borrowing history, so it’s important to check your credit rating at least a year before attempting to get a mortgage.
- Get a professional accountant
Getting the help of a certified or chartered accountant can increase your chances of a successful mortgage application.
Using a professional accountant helps ensure that all of your accounts are in order and that everything adds up. This is ideal if you’re not that confident with finances, and want to make sure everything is accurate.
In fact, there are certain lenders that will only consider applications handled by a professional accountant.
- Speak to a mortgage broker
As there are lots of different ways of being self-employed, it can be helpful to speak to a mortgage broker, as they can weigh up your circumstances and advise you on which mortgage may work best for you. You can read our guide on different types of mortgages here.
A mortgage broker can find you the best deals on the market, and will give you a realistic idea about what you can expect to get, depending on your circumstances.
If you have experienced any ups and downs with your income, then a mortgage broker can advise you on how that might affect your application.
When reviewing your mortgage application, lenders will look at your spending to decide whether you will be able to repay what you borrow.
If they feel you are being overly ambitious in taking on a mortgage, they will reject your application.
So, it’s a good idea to manage any poor spending habits before making your application.
You can increase your applications’ chance of success with the type of property you’re trying to buy.
Lenders are less likely to support applications for certain properties, including old or unusual buildings, or flats above commercial spaces.
Be honest and organised
When you make your mortgage application, it’s important to be open and honest.
If you attempt to hide anything, it will more often than not be picked up somewhere down the line and this can really hurt your chances of being accepted for a mortgage.
As we noted above, speaking to a mortgage broker can be helpful. If there are any issues with your finances, they will help to present the information to lenders in the most positive way.
They’ll also help you stay organised, and ensure your application is complete with all the necessary information.
What if you don’t meet the criteria?
If you struggle to be accepted for a mortgage by a mainstream bank or building society because of your self-employed status, you may be able to find a specialist lender that focuses on self-employed applicants. It’s important to note that borrowing from these lenders may mean higher interest rates.
It can also be helpful to seek specialist advice from a mortgage broker. As professionals they’ll know which banks and building societies favour the self-employed, and will help ensure that you get a good rate.