Is It Hard To Get A Mortgage If You're Self-Employed?
15th May 2017
Getting a mortgage can be more difficult if you’re self-employed, but it’s usually possible. Some lenders are cautious about lending to people with a ‘non-standard’ income, but with a decent deposit, a good credit rating, and at least two years of self-employed accounts, there’s no reason why you shouldn’t be able to get a mortgage.
Can I get a mortgage when I’m self-employed?
The short answer is ‘yes’ - as long as you meet the bank’s lending criteria. In theory, self-employed people - including contractors, freelancers, and small-business owners - should have access to the same mortgage products and interest rates as employed people. Proving your income can be a little more complicated though, and you may find yourself jumping through more hoops than someone who’s in full time employment.
How do I prove my self-employed income?
When you apply for a mortgage, the lender needs to check whether you’ll be able to afford the repayments, even if interest rates rise. If you’re employed, you’ll usually prove your income by providing their payslips, but when you’re self-employed, it’s not as simple.
In the past, self-employed people could sometimes ‘self-certify’ their income, which meant they’d tell the lender how much they earnt without providing much proof. Self-certification mortgages have now been banned and mortgage criteria have been tightened, so if you’re self-employed, you need to provide evidence of your income.
To do this, you’ll usually need to show your company accounts, tax returns, or SA302s. An SA302 is a tax calculation document that provides evidence of your self-employed earnings. If you submit your tax return online, you can find your SA302 in your HMRC online account, although you’ll need to check if your mortgage lender accepts documents that you’ve printed yourself.
Most lenders ask for two or three years of accounts, although some are prepared to consider applicants with only one year of accounts. Many mortgage providers will only accept accounts that have been prepared by an accountant, and some lenders will insist that the accountant is chartered or certified.
You may also need to prove that your business is doing well and that you’ll be able to maintain your income - for example by showing that you have ongoing contracts, or future work lined up.
Regardless of whether you’re employed or self-employed, you’ll need to provide things like bank statements and utility bills so that the lender can look at your outgoings when they’re calculating the amount you could afford.
How much will I be able to borrow?
The amount you can borrow depends on several factors, including the size of your deposit, your credit history, and your income and outgoings. Whether you’re employed or self-employed, the maximum you can usually borrow is four or five times your annual gross income (i.e. the amount you earn before paying tax). You can use Trussle’s mortgage affordability calculator to get an idea of how much you could borrow.
Obviously if you’re self-employed, your income is likely to go up and down. Many lenders take your income over the last two or three years and calculate the average to figure out how much they’re willing to lend you. Others will look at your income from your most recent year of trading. If your income has increased since you prepared your last tax return and you have some proof of this, the lender may be able to take this into account.
How can I increase my chances of getting a mortgage?
For all applicants, factors like deposit size and credit history affect the chances of getting a mortgage. However, when you’re self-employed, these things can be even more important.
You stand a better chance of being approved for a mortgage if you have a decent deposit relative to the value of the property you want to buy. Having a deposit of around 20% puts you in a good position, alongside a solid credit history. Lenders may check your business credit history as well as your personal credit history.
Also, be careful about your accountant minimising your taxable income. Accountants often try to do this so that you pay less tax, but this could impact the amount you can borrow, as the lender will be looking at your income to make calculations.
If you’re a director of a limited company, you may keep some of your profits in the business rather than taking them as salary and dividends. If this is the case, you might need to find a lender who’ll take these ‘retained earnings’ into account when making calculations.
How can I get a mortgage when I’m self-employed?
It can be a bit trickier to get a mortgage when you’re self-employed, so using a mortgage broker is a good idea and will help you avoid any doubt. At Trussle, we search through over 11,000 mortgage products from more than 90 lenders. We can find the right mortgage for you without the usual hassle - we don’t require lengthy face-to-face meetings and won’t ask you to fill in reams of paperwork. We’ve been able to help many self-employed people find the right mortgage, like freelance designer James.
As long as you have at least one year of self-employed accounts, we can look for a mortgage for you. When you apply, enter your pre-tax income as it’s shown on your tax return. This can be a combination of your dividends and salary if you run a limited company, and your profits if you’re a sole trader.