Self Employed Mortgages - What you need to know

When it comes to getting a mortgage, being self-employed can add an

extra layer of complexity. Unfortunately, lenders don’t always make

the process easy for small business owners and freelancers who have

irregular incomes or don’t fit into traditional lending criteria. However,

with the right knowledge and preparation, it is possible to secure a

mortgage as a self-employed individual. In this blog, we'll take a look

at everything you need to know about applying for a mortgage when

you're self-employed.

What is a Mortgage?

A mortgage is a type of loan that allows you to borrow money from

a lender in order to purchase a home or other property. The

property itself acts as collateral for the loan, which means that if you

fail to repay it, the lender can repossess the property and sell it to

recoup their losses. Mortgages typically have long repayment terms

and low-interest rates, making them an attractive option for many

homebuyers.

How Do I Get Approved for Mortgages if I'm Self-Employed?

For people that are employed, the process of getting approved for a

mortgage is relatively straightforward. For the self-employed is not

always that simple, lenders will look at your business performance,

affordability, credit score, debt-to-income ratio and other factors to

determine whether or not you qualify. They may also take a look at

your previous employment history for contractor mortgages to ensure

that you have experience. How you present your income to a lender is

so important. Some self employed people are paid in different ways

so its important to understand how you are paid in the lenders eyes

so you present the income in a way this benefits you best.

What Counts as Self-Employed?

In a mortgage application, you're defined as self-employed if you own

more than 20 to 25% of a business, which is your main income. Self-employed

people often fall into three main categories: sole trader,

company director or contractor.

Limited Company:

If you are a company director, your income is normally

made up of salary, dividends and any benefits you receive

from the business. Lenders will look at your salary and net

profits or salary and dividend payments to calculate income

for a mortgage as a limited company director. Most lenders

take an average of the last two years income, but some high

street specialist lenders calculate your income using the last

years figures only. If you own less than 20% or 25% shares

with some lenders they will class you as employed. A

specialist lender will allow salary and net profits to be used

to calculate income affordability, this can be very beneficial

for tax planning.

Contractor or Freelancer:

If you are a contractor or freelancer, specialist lenders will

use your contract as income proof, this allows you to

calculate your income using your day rate instead of your

lower taxable income. You are also not require to have been

self-employed for 12 or 24 months. You can get a contractor

mortgage once you have completed your first 3 months as a

contractor as long as you have 2 years industry experience

as am employee. CIS workers can use their CIS

slips/Statements like pay slips. You can use your gross day

rate and the lender will use an average of your last 3

months gross CIS income to calculate your annual salary or

the last 12 months gross CIS income added together. As the

lender does not ask contractors to prove taxable income

you can be as tax efficient as possible.

Sole Trader:

Basically you are a sole trader if you have registered self-employed

and submit a tax self-assessment to HMRC but

you don't have shares in a limited company. To certify your

income, you’ll then have to provide your mortgage lender

with an SA032 form that shows your total income. Lenders

then take an average of the last 2 years net profit (Income).

Some Specialist Mortgage Lenders will use the latest years

net profit figure. A couple of specialist lenders will only

require 12 months trading history, instead of 24 months like

most lenders require. If you are a contractor or freelancer

specialist lenders will use your contract as income proof,

this allows you to calculate your income using your day rate

instead of your lower taxable income. You also only need to

have been a self employed contractor for 3 months. Not 24 months like most self-employed sole trader are required to prove.

Self-Employed Mortgage Basics:

When you are self-employed and you want to secure a

mortgage loan, there is often more paperwork involved

than for someone who works for an employer. Because you

don’t have the same kind of guaranteed steady income,

lenders may require additional information from you to

evaluate your financial situation and ensure that you can

repay the loan. Mortgage lenders often require the

following:

?One or more years of certified accounts

?SA302 forms and a tax year overview (from HMRC) for the

past one, two or sometimes three years

?Evidence of dividend payments or retained profits

As well as evidence of your self-employed income, you will

also need to provide:

?Passport

?Council tax bill

?Driving licence

?Utility bill

?Bank statements (one to three months' worth)

The Three Main Qualification Requirements for a Self-

Employed Mortgage:

Mortgage lenders will look at three main qualification

requirements for self-employed mortgages. Let's take a look

at these in more detail:

1. Credit Requirements:

A good credit score is ideal when it comes to qualifying for a

self-employed mortgage. If you're on a self-employed

income, some lenders may require a higher credit rating as

evidence that you can successfully pay your bills. This is not

always the case. If you have a lower credit rating, it is essential to try and

improve this prior to applying for a self-employed

mortgage, as lenders will assess this before making their

decision.

2. Deposit Requirements:

When it comes to deposit requirements, lenders will look

for at least 5-10% of the purchase price as a down payment

(Deposit). This is especially true for self-employed

borrowers, as lenders want to ensure that they have the

finances to make mortgage payments. In addition, lenders

may also require proof of other assets, such as investments

or savings accounts in order to qualify. This helps the lender

determine if you are able to meet all your debt obligations

and can be used as a cushion in the event of an emergency.

3. DTI Ratio:

Finally, your Debt-to-Income (DTI) ratio is also important for

self-employed mortgage applicants. This compares how

much you owe each month to how much you earn and is

used to illustrate how much you are able to afford. A good

DTI ratio is 36% or less, and anything over 43% may require

a lower loan to value product (LTV) or other compensating

factors.

How Much Can You Borrow as Self-Employed?

The amount you can borrow as a self-employed individual

may vary depending on your lender. Generally speaking,

you can borrow 4 to 5 times your annual income. For

example, if you have an annual income of ￡50,000, you may

be able to borrow up to ￡250,000. It’s important to

remember that affordability is determined case-by-case,

and lenders can be more or less lenient depending on your

circumstances. It's also worth noting that some lenders may

be more geared towards self-employed applicants, so it's

worth researching to find the best deals.

Here at Jones and Young, we understand that self-employed

clients have unique requirements, and we are happy to

work with you to find the most suitable loan for your needs.

For more information and advice, please contact our team

today!

Top Tips Boost Your Mortgage Chances:

A self-employed mortgage applicant should, wherever

possible, try to:

1. Avoid Extended Breaks:

Lenders will want to see a consistent pattern of self-employment.

Try to avoid taking long breaks between jobs

or starting and stopping new businesses, as this can impact

your eligibility.

2. Keep Good Records:

You'll need to provide reliable financial records such as tax

returns, business accounts or SA302s that show you have

been in business for a sustained time.

3. Use an Experienced Broker:

An experienced broker can help you to find the best deals

that are tailored to your individual circumstances. They

have access to a wide range of lenders and products, so

they can advise you on the most suitable mortgage for your

needs.

4. Improve Your Credit Score:

A good credit score can help to increase your chances of

getting accepted for a mortgage. Make sure to pay off any

existing debts and check your credit report for any errors

that could hurt your rating.

5. Consider a Guarantor Option:

If you’re having difficulty finding a lender willing to offer

you a loan, consider asking a relative to act as a guarantor.

This can help to prove your affordability and help you

increase the borrowing power of your application.

6. Have a Larger Deposit:

A larger deposit will help to reduce the amount of

borrowing you need and can also increase your chances of

being accepted for a loan. Generally speaking, lenders

prefer deposits of around 10-15% or more, but this may

vary between providers.

7. Consider Your Cashflow:

Make sure to manage your cash flow carefully so you can

maintain regular payments. Some lenders may be more

willing to accept irregular-income applicants if they can

prove that their cash flow is sufficient to cover repayments.

We hope that this has been useful and has given you a

better understanding of the self-employed mortgage

process. If you have any more questions or would like to

discuss your options, please do not hesitate to get in touch

with our team today! We'll be happy to help.

Self-Employed Mortgages FAQs:

We've done our best to try and answer some of the most

frequently asked questions about self-employed mortgages

below:

Is it hard to get a mortgage when self-employed?

Getting a self-certification mortgage is no longer possible. Getting a

self employed mortgage shouldn't be too challenging as long as you

can prove that you have a reliable income. Mortgage providers will

often ask for bank statements, credit scores, and DTI ratios to work

out if you're eligible for one. Our advisors at Jones and Young can

provide you with more information and assistance if needed.

How long does it take to get a self-employed mortgage?

Depending on your circumstances, it can take anywhere from a few

weeks to several months. The process involves completing paperwork,

gathering relevant documents, and meeting with the lender to discuss

options.

How many times my salary can I borrow for a mortgage selfemployed?

As a general rule, self-employed people can borrow 4 to 5 times their

annual salary.

How do you work out a mortgage for self-employed?

When applying for a mortgage, lenders will typically use the figures

you've submitted in your tax returns or accounts. Using these, they

are able to make a judgement on the loan you can afford. Contractors

they will use your gross contract day rate or CIS gross pay.

How much deposit do you need for a house if you are selfemployed?

Lenders generally ask for a 5-10% deposit if you're self-employed and

looking to buy a house. The higher your down payment, the lower

your interest rates will be. This is because lenders view larger deposits

as less of a risk.

Can I get a mortgage within 3 Months of being self-employed?

No, unless you are a contractor or freelancer. Generally you must have

been self-employed for at least 12 months. Mortgage lenders

calculate your trading history and income records to prove that you

can afford the loan repayment with an acceptable degree of certainty.

The majority of lenders will require 2-3 years' worth of SA302 as

evidence of your earnings. Only specialist lender allow 12 months

trading history

What is a joint mortgage?

A joint mortgage is one that you share with other people, e.g. a

partner or friend. A joint mortgage can be more affordable. Lenders

do allow you to mix self-employed income with employed income to

maximise the amount you can borrow. If you currently pay higher

mortgage rates using both incomes could reduce your interest rate

and make you look ofr attractive to more lenders. It also means that if

one of you has difficulty making payments, the other person is

responsible for covering them