Can you get a mortgage if you’re self-employed?
In a word: yes. Getting a mortgage if you’re self-employed is slightly more fiddly than if you’re an employee of a company. But if you can prove you’ve had solid earnings and a decent income history, you should be able to access the same rates and deals as salaried employees.
How do you prove your income when applying for a mortgage?
Lenders will ask you for different information based on what type of self-employment you’re in. The exact requirements will vary from lender to lender, but here’s what you can likely expect.If you’re a contractor or freelancer
You’ll need to show your most recent employment contracts so the lender can see what you earn as a day rate. The lender will then average out the figures in your contracts over the course of a working year to get an annual salary figure for you.
You should also have your SA302s/tax calculations
and tax year overviews ready. Some lenders will insist on seeing them, so not having them limits your options in terms of which lenders you’ll have access to.
If you’re paid a day rate as a contractor or freelancer, this shouldn’t be a problem – you should be able to use your SA302s/tax calculations, tax year overviews, and contacts to prove your income.If you’re a sole trader or landlord
You’ll almost certainly need to provide your SA302s/tax calculations
and tax year overviews for at least the last two years. You or your accountant can print these yourselves from your HMRC online account – double check that format works for your lender first! Some lenders might ask you for some other bits as well, but it varies from lender to lender.
If you own a limited company
If you own a limited company, you need to get your income paperwork put together by an accountant – that way, the lender can be fully confident that the figures you’ve put forward are accurate. You’ll need to show your SA302s/tax calculations
, tax year overview and the company accounts for the last two years.
Different lenders will want to see different figures. Some just look at salary and dividends. Some look at salary and share of net profits after corporation tax – with some lenders averaging it out over the last 2 years, or using the latest year’s figure if it’s the lowest. Your mortgage broker will help you find a lender who’s most suited to your needs.
If you’re in a business partnership
Lenders will look at your share of the company’s profits if you’re in a partnership, rather than how much money you and your partner make together. You’ll need to make sure your accounts show this information clearly. Also make sure you have your SA302s/tax calculations
and tax year overviews to hand.
How much can you borrow if you’re self-employed?
The short answer: it depends. When you apply for a mortgage, the lender carries out an “affordability assessment” to work out if they’re happy to lend you money – and how much. They’ll look at things like your earnings, your spending, and how secure your income is – here’s a more detailed breakdown.
How much you earn on average
If you’ve been contracting or freelancing for a few years, the lender will most likely add up your income from each year, then work out the average. For example, if you earned £20,000 in your first year of contracting, £25,000 in your second year and £30,000 in your third year, the lender might assume that your average salary for the sake of the mortgage application is £25,000. If your earnings have been going up regularly, the lender may base their calculation on your most recent tax year.
As a rule of thumb, if you’ve got a decent deposit to put down (say 10% of the property price) and your self-employed income is consistent and well-documented, you should be able to borrow around 4.5 to 4.75 times your salary before tax (your ‘gross annual income’).
How much your earnings have fluctuated
Fluctuating earnings can frighten some lenders. If your earnings have fluctuated massively, be prepared for lenders to use your lowest earning year as your salary when they do their affordability assessment. That means you might end up with a lower mortgage offer than you were hoping for.
If you can explain a dip in earnings – say you had a baby or upgraded some equipment maybe – most lenders will be satisfied that you’re still a safe bet.
What your regular outgoings are
Mortgage lenders have to be able to prove they’ve lent responsibly, so they’ll look closely at how much you can realistically afford to pay each month. Lenders want an idea of your personal and living expenses, so you should be prepared to show them things like:
- Evidence of credit card repayments
- Evidence of any maintenance payments
- Insurance contracts (buildings, contents, life)
- Any other loans or credit agreementsHousehold bills (water, gas, electricity, phone, broadband)
- Estimates of general living costs (spending on clothes, groceries, childcare, going out, holidays)
How secure your income is
Lenders will want to stress-test your finances to check they’re future-proof. They’ll want to know you’ll still be able to afford your mortgage payments if interest rates rise or your situation changes – like if you take time off work to have a child or you’re forced into a career break.
Still in your first year of trading?
You most likely won’t be able to apply for a mortgage if you haven’t filled out a tax return for your first year of trading. That’s because from a lender’s perspective, you don’t have acceptable evidence of your income yet.
Without a first year’s tax return to analyse, most lenders can’t really judge your affordability – even if you’ve had a brilliant first few months working for yourself. There are some specialist lenders out there who might be able to help, but it’s likely your choice of mortgages will be super limited.
What is a mortgage in principle?
A mortgage in principle (MIP) is a statement from either a broker or lender saying you should be able to borrow a certain amount of money, subject to further checks of your credit and the property you’re buying.
An MIP can make you a more attractive buyer to sellers and estate agents, and help you make a more confident offer on a property. You could conceivably apply for a mortgage in principle as early as just before the end of your first year of trading.
Learn more about getting a mortgage in principle
Why does having a healthy deposit matter?
If you’re self-employed, a healthy deposit will boost your chances of securing a mortgage. The higher the deposit you can put down, the less risky you’ll appear to the lender.
Let’s dive into some mortgage jargon: your loan to value ratio, or LTV. Your LTV is the size of your mortgage as a percent of the total property value.
Say you want to buy a property worth £250,000. You have a deposit of £20,000 already, so you need to take out a mortgage of £230,000.
That makes your LTV:
230,000 / 250,000 = 0.92
x 100 = 92%
The higher your deposit, the lower your LTV. So if you put down a 10% deposit on your home (without using any schemes to buy it) that’s a 90% mortgage, or 90% LTV.
Lenders look at your LTV to decide whether to lend to you or not. They also use LTV to decide what interest rates to offer you – usually, the greater the deposit you can put down, the better the interest rates you’ll be able to access.
How do you make yourself credit-check worthy?
Credit scores: a quick refresher
Your credit record is the history of how you’ve managed your money in the past: a list of your accounts, like credit cards, phone contracts and utility bills, the amounts you owe and the dates they were started, and, crucially, any late or missed payments.
It also lists any CCJs (county court judgements), repossessions or bankruptcies. This is all written up as your credit report, and summarised in one number: your credit score.
Before they agree to lend money to you, a lender will run a credit check on you to read your report and see your score. This will only ever be with your permission, and after they’ve already run their basic affordability checks.
If you have a business, lenders will do a credit check on both your business and on you as an individual. So make sure there aren’t any outstanding debts, and double-check that you’re not late with any payments to suppliers.
Having a good credit rating is key to a successful mortgage application. A bad credit rating will affect what interest rates are available to you – and whether you can get a mortgage at all.
Where to get your credit report
Before you apply for a mortgage, it’s a good idea to get a copy of your credit report and check it yourself. That’s because sometimes tiny mistakes in there, like a wrong address history, can pull down your credit score. But you can fix them before you approach lenders!
Credit reports are worked out by credit reference agencies, or CRAs. There are three of these in the UK – Experian
. It’s worth getting a report from all three, as each is worked out a little differently. A mortgage broker will be able to help you understand your credit report if that would be useful.
Once you get it, work through this credit score checklist
to make sure your score is as good as it can be before you apply for a mortgage.
You can check your report as often as you like, it won’t affect your credit rating.
Should you use a mortgage broker if you’re self-employed?
Tracking down the right mortgage with the best rate is a minefield – even more so if you’re self-employed. Not all lenders’ criteria for self-employed mortgages is the same. For example, one might ask you to come up with three years of accounts before they even consider your application, while another might be willing to accept just two or even less. That’s where the expertise of a mortgage broker can really make a difference to whether you get approved or rejected.
A broker can help you navigate the range of options out there (just make sure they’re “whole of market” – like Habito).
They’ll look at your specific circumstances, flag up what lenders might see as too risky, and help you choose which lender to apply with. A broker should make sure you only apply to lenders who are likely to accept you, and keep you away from those who won’t.
They’ll also take a lot of the legwork out of the application process, and save you time and money too.
It’s definitely not compulsory to use one, but it can really help.
What are self-cert mortgages?
Self-employed people used to be able to prove their income by applying for a self-certification (or self-cert) mortgage. This allowed you to ‘self-certify’ how much you earned in a given year – which effectively meant you could take out a mortgage without having to actually prove what you earn.
Eventually, the Financial Conduct Authority (FCA) banned self-cert mortgages – they put people at risk of taking on debt they couldn’t afford to pay back. So now, if you’re self-employed, you have to be able to prove your income just like everyone else.