Getting a mortgage if you work for yourself isn’t always easy, especially if you’ve only recently become self-employed.
Self-employed workers are twice as likely to be rejected for a mortgage than those who are employed, according to a report from The Mortgage Lender. Nearly a quarter (23%) of self-employed individuals have had their mortgage application denied in the past compared to just 12% of employed workers, as they are often subject to stricter affordability assessments. This is mainly because they are considered to have more irregular or complex incomes so are more at risk of not being able to keep up with mortgage payments.
Self-employed homebuyers used to be able to get a mortgage without having to prove their income – instead, they could simply give an estimate, with some over-inflating these numbers to secure the mortgage they needed.
Lenders stopped offering these ‘self-certification’ mortgages following the 2008 financial crisis and self-employed mortgage applicants now must provide accounts showing their income. So how long do you have to have been trading for in order to qualify for a mortgage if you’re self employed?
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
If you have at least two years’ accounts
Most lenders want you to have at least two years of certified accounts from an accountant, but also self-assessment (SA302) forms or a tax year overview (from HMRC) for the past two or three years. Because most people prepare their accounts so long after the end of the tax year you could have been trading for well over three years. Even if you can produce two years’ accounts, it’s worth bearing in mind that:
- The accounts should be recent. If you’re applying for a mortgage and your accounts are more than several months old, the mortgage lender may ask for further proof of income. If you’re thinking of applying for a mortgage it’s worth getting your accounts prepared before you do, so make sure all your paperwork is as up to date as possible.
- Your income should be stable or rising. If your business is new, lenders will understand if your earnings are low in the first year but they will want to see that it’s on the way up. If you’ve been trading for a while, lenders won’t mind minor fluctuations but they will be concerned about a fall in earnings, unless it’s something you have a very good explanation for.
- Lenders will look at your credit score too, to see how you’ve managed your debts in the past. They will also consider factors such as how long you’ve lived in your property for if you’re remortgaging, whether you’re married or single, how long you’ve had your bank account for and what your outgoings are.
You can easily check your credit score for free. ClearScore offers a free credit checking service that accesses Equifax data. They also offer free identity protection that scans for stolen passwords, security problems and fraud defence tips. MoneySuperMarket’s Credit Monitor tool lets you check your score using data from TransUnion and offers free personalised tips to help it grow. Alternatively, you can sign up with Experian and check your credit score with them for no charge and Totally Money also allows you to check your score free of charge using data from TransUnion.
If you’re concerned that your credit score might need a boost before you apply for a mortgage, read our article on Seven steps that could improve your credit score.
If you only have one year’s accounts
If you only have one year’s accounts you may still be able to get a mortgage but your choice of lender will be severely limited. You should also bear in mind the following:
- Keep your borrowing below 75% of the property’s value, if possible. Your application will be much more closely scrutinised if you want to borrow more than 75%.
- Go to a lender that uses an underwriter to assess applications. Many of the larger lenders use a computerised scoring system but some are more flexible when it comes to self-employed applicants. A good mortgage broker will be able to tell you which lenders are worth approaching.
- If you’re going self-employed in a similar line of work, this will help. Mortgage lenders look for a track record so if you’ve worked for a company and are going freelance but doing a similar job, that will be seen as a lower risk than if you’re taking a complete change of direction.
- If you have a couple of contracts for your new self-employed role that will help your application. However, you are still likely to struggle to get a mortgage if you’ve been self-employed for less than a year, even if you’re doing essentially the same job as before.
If you have a limited company
If you have a limited company, you’re likely to be paid a mixture of salary and dividends. If you’re leaving money in the company to fund future growth, this may be ignored by lenders.
- Salary and dividend payments. Some lenders will only look at the amount of money you’ve taken out of the company in salary and dividends, which may not be enough to get you the mortgage you want or need. If you’re taking a lower salary it may be worth increasing your dividend payments. Talk to your accountant and to a mortgage broker about what’s feasible and what you might have to do in order to get a mortgage.
- If you leave money in the company. Some lenders will also take retained profits into account.
Where to go for more help
If you’re self-employed or work as a contractor, then it can be helpful to use a mortgage broker to reduce the chances of your application being declined. They will have a broad knowledge of the different types of mortgages and lenders that are available and welcome applicants from self-employed individuals. They will also be able to recommend the best deal for you based on your individual circumstances and advise you on how much you’re likely to be able to borrow, and how much it will cost.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
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