Self Employed Mortgage - How to Improve your Chances of Getting One
If you’re self employed, getting a mortgage now is more difficult than ever.
With the economic uncertainty from the Covid-19 pandemic, banks have been tightening their restrictions – especially for self employed borrowers.
It’s just a case of knowing where to look and taking the right steps to increase your chances.
Why is it difficult to get a self employed mortgage?
1. You are applying for the same mortgage as an employed person
There is no specialist self employed mortgage product. Self Certification Mortgages used to fill this gap, but since the 2008 economic crash, they have become a thing of the past.
This means that you are competing with employed people (who have guaranteed, long-term contracted income) for the same products.
These days, banks usually lean on the side of caution, so it makes sense for them to prefer employed applicants.
2. The market is constantly changing
Since Covid-19, mortgage lenders are constantly adapting their criteria to the post-pandemic economy. This is unpredictable, reactionary, and constantly changing.
Some banks now have very different lending criteria to others, especially when it comes to self employed income.
This makes it difficult to know whether you will be accepted, and difficult to choose which lender to approach.
Too many rejected applications will leave a red flag against your name for future applications. This is why using a specialist mortgage broker is often the safest and quickest option when applying for a mortgage as a self employed individual.
3. Covid-19 income support grants could hold you back
An example of this varying lending criteria is with borrowers who have used the government’s Covid-19 income support grants.
Some banks are completely ruling out anyone who has used these support grants, while other lenders are capping the amount they will loan.
Specialist mortgage brokers know which are the best lenders to contact to not only get your application through but also get the best rates available on the market.
Top tips for getting a self employed mortgage
Prove your income
Lenders will only accept specific HMRC tax documents as proof of your self employed earnings:
- SA302 (Tax Calculation)
- Tax Year Overview
Get these ready in advance, and for at least the last two years (the more the better). Provided that you have submitted tax returns for the relevant years, you can download them online, or request them in the post from HMRC.
Some lenders will also ask you for information on future contracts or prospects as proof of your upcoming work. This way they know you will likely keep earning similar amounts of income in the future and will treat your income as more reliable.
The more you can evidence your business’s longevity, the better. This could affect how much you can borrow, and how much interest you will have to pay back.
Use an accountant
Some lenders will only accept your application if your income is signed off by a chartered accountant. Your projected income will be more reliable from a bank’s perspective if it has this form of certification.
Remember – the most tax-efficient self employed income isn’t always the best for a mortgage application.
If you own a limited company, then taking dividends as your main source of income is often the most tax-efficient method. However, it doesn’t necessarily look better from a lender’s perspective and they can prefer to use a salary for their underwriting calculations.
Make sure you also think about how much cash you are retaining in your business. Some lenders will see this as capital that can be drawn on as an income and will factor it into their mortgage calculators.
However, others will rule it out and won’t take it into account with your application. In this case, it could be worth drawing more income or going with a different lender.
Better credit score – better mortgage
The higher you can get your credit rating, the better.
While it’s not the be-all and end-all for your application success, you want to iron out any red flags that might come up in your credit report. Here are some top tips:
- Pay off your credit cards regularly and on time
- Pay your bills via direct debit
- Tidy up old bank accounts
- Avoid using your overdraft
- Use the Rental Exchange Initiative (if you’re currently renting)
- Use Experian Boost – your Netflix, Spotify, Council Tax payments and other financial services can boost your score
- Un-link yourself from ex-partners (you might not realise you are still financially connected)
Get a bigger deposit
Having a bigger deposit is a simple way of reducing the risk for your mortgage lender. The more you put up yourself, the less they need to lend you, so you are more likely to be accepted and get preferable rates.
If you can push your deposit into the next percentage band, this could make even more of a difference.
Your current deposit could be 19% of your property value, for example, and pushing it up to 20% might not take much, yet could make a huge difference to your application.
Also, going over the band threshold by as little as £100 can increase this even further and get you better interest rates.
On top of this, if you have savings to show, make sure you inform your lender. They will take these into account as a reserve you can fall back on should you experience fluctuations in your income levels.
What type of self employed income can I use for a mortgage?
The main types of self employed earners are:
- Sole Trader – you work for yourself and keep all the profits from your business. You will pay income tax and require an SA302 to prove your income to your lender.
- Freelancer - Similar to a sole trader, but you likely work for different companies perhaps with longer contracts. If so, proving future contracts and arrangements could be great for your application.
- Partnership – if you are in partnership with another shareholder, make sure you can prove your ownership and earnings from the business to your lender.
- Limited Company – if you have set up a limited company then you will likely be paid via a mixture of salary and dividend payments for tax purposes. Make sure your lender factors in all of your income sources as well as any retained profits within your company.
Don’t switch if you don’t have to
If you are considering changing the structure of your self employed income (for example, if you’re a sole trader looking to incorporate a limited company) then you should consider waiting until after you have applied for a mortgage.
Even though you may end up earning more after tax by doing this, the change could cause an issue with your mortgage lender as they might see it as a new form of income that doesn’t have years of history to back it up.
How to be prepared and get a faster mortgage
When you find your dream property, you need to move fast. Particularly in the current market, some properties are being snapped up incredibly quickly, so you don’t want your mortgage application to slow you down.
Here’s a list of the essentials to get together before you make your application:
- Recent Bank Statements (preferably showing a regular and reliable self employed income stream)
- ID documents & proof of address (e.g., passport and driving license) - make sure these are still in date!
- SA302 Forms (Tax Calculation) for 2+ years
- Tax Year Overview for 2+ years
Do I need a Mortgage Broker?
Due to the complexities of self employed mortgages, a Specialist Mortgage Broker can be vital in getting the best deal for your circumstances.
Even with standard mortgage applications, a broker will check the entire market for the best deals available to you. But if you need a self employed mortgage there are even more reasons to use a broker:
- Different lenders have different criteria – we know who will accept your circumstances and who won’t
- Lender criteria is changing – due to the pandemic, requirements are changing constantly. Our brokers are arranging mortgages every day and are in tune with the best deals as soon as they become available
- We can save you time – we know exactly what you’ll need and will liaise directly with our contacts at each lender. You won’t have the relentless back and forth with different agents like you do if you speak to a mortgage lender directly
- We can advise on the best product for you – every application is different, and if you don’t know all the options available to you, you can’t pick the best one. We have the market knowledge and qualifications to make the decision for you.
Speak to our team now on 0117 959 5094.
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