There are over 4.9 million self-employed people (source: ONS; EMP14 August 2019*) in the UK and contrary to popular belief getting a mortgage and being self-employed are not mutually exclusive. Let us look at the requirements of a self employed mortgage.
The key thing to consider is that lenders don’t just look at the numbers when approving a mortgage – there are are several other factors that influence this decision. Below are the things to consider when applying for a mortgage when you are self-employed.
Speak with a broker: It’s worth mentioning this upfront as not all lenders have the same criteria and a broker will ensure you are matched with the most suitable lender.
Check your credit file: Ensure that there aren’t any adverse entries against you, especially ones you are unaware of. Soft checking your own credit score will not have a negative impact on it.
Ensure you are on the electoral role: Check with the local council and get on the electoral role if you are not already – this will help in improving your credit score.
Make sure your accounts are all up to date: To be given access to the most competitive rates, you need to have a good credit record. Start working on this in advance by making sure everything is paid on time. It’s good practice to put everything on direct debit. Read up our article on improving your credit score.
Stay away from payday loans: Payday loans do not paint a good picture of your finances and lenders often read this as you being in financial difficulty. Many lenders will simply decline to lend if there is a recent record of payday loans.
Minimise credit checks for other insurance or credit applications: Multiple credit checks in a short space of time raises red flags in the lender’s mind not to mention having a negative impact on your credit score – which defeats the purpose of working towards a mortgage. Be aware if using comparison sites for insurance as multiple checks will be run.
Don’t allow your credit card to reach its limit: Maxing out your credit card is a no-no as this will affect your credit score negatively. We suggest spreading outstanding balances across two cards, rather than having one on the limit.
Don’t just make minimum payments: Again, making just the minimum payments can suggest to the lender that you are in financial difficulty. It’s also worth considering this because unless you are on an interest free card, the minimum payments will not end up paying down the debt.
Sort your deposit early: Preparation is key, especially is family members are gifting you funds towards your deposit.
If using business funds, speak with your accountant: Doing regular withdrawals can lead to a smoother underwriting rather than taking a large lump sum in one go. When taking a large sum the lender may ask the accountant to confirm that this will not be detrimental to the business, causing an extra delay in the process.
Get your documents in order: See our checklist of documents below.
Get an agreement in principle: Most agents will not let you view the property, let along make an offer without an agreement in principle. This will confirm the most you can borrow and help you look at properties within budget. It is also a good indication that your credit is in order.
What documents do I need to apply for a mortgage?
In the past, self-employed people got round the problem of proving income by using self-certification mortgages, where you would state your income and a lender would take it on trust. However, too many people took out mortgages they couldn’t afford and these loans are no longer allowed.
Nowadays, mortgage lenders will ask for the following if you’re self-employed:
ID: Make sure you have a valid photographic ID, if presenting your driving licence, ensure it has your current address on it.
Proof of Address: A council tax, utility bill or financial statement will suffice. If everything is online, you should change one of your accounts to postal statements.
Employer: You will need three to six month’s payslips and P60s. If you have received extra income such as a bonus or commission, some lenders may requrie two years worth of P60s.
Limited Company Accounts: If you are a limited company director then the last two years worth of fully signed accounts is required in most cases. The latest accounts cannot be more than 18 months old, so try and finalise the latest year’s accounts as soon as possible. Please remember that income means profit and not turnover – if you have legitimately suppressed your profits to minimise income tax, this will work against you when applying for a mortgage.
Personal Tax Returns: Self- employed workers need to request three years SA302s and a tax review from HMRC – some lender’s will accept as little as one years SA302, but three years worth will give you access to a wider range of lenders and details.
Contractors: You need the last 12 months of contracts, signed by all parties. They need to show your day rate and need to be paid in sterling, with an expiry date ideally included on each contract. Rolling contracts are also acceptable.
CIS or Umbrella: Six month’s worth of payslips are required.
Bank Statements: They can be postal or downloaded versions of the last three months salary fed bank statements and three months business bank statements.
Deposit: You would need to provide a statement showing funds held and a build-up of funds. If funds are a gift from a family member, you need a statement letter from confirming they have funds or that this has been transferred to you.
Background buy-to-lets: If you have buy-to-let properties as a source of income, then a Tenancy Agreement and three months bank statements to evidence rent will be required.
Life Insurance or other protection: Lenders usually need evidence of any Life Insurance you have in place to cover the mortgage.
To sum it up, self-employed mortgages are a bit of a minefield and you really need access to expert knowledge.
*Download report here