Top Tips for Getting a Mortgage While Self-Employed

Top Tips for Getting a Mortgage While Self-Employed: If you’re self-employed getting onto the property ladder can seem like an unachievable feat, especially as in recent years it has become increasingly difficult for everyone to get a mortgage. Thankfully, it certainly isn’t impossible and there are a few things you can do to improve your chances of finding the best mortgage deals.

Top Tips for Getting a Mortgage While Self-Employed

What you’ll need

It’s important to first understand what is required to get a mortgage, and how you can prove your income.  Essentially this boils down to you providing the prospective lender with at least two years’ worth of accounts, proof of regular work and the ability to put down a sizable deposit, and lastly a strong credit history. Usually, lenders also prefer you to have used an accountant to put all your papers in order so that you can present your accounts in an organized and clear fashion. This is especially helpful for the self-employed, freelancers, or business owners.

You shouldn’t worry too much if you are unable to provide two years’ accounts, as long you can show you have a history of a steady income, or that you have future work already lined up.

One of the most important parts of getting a mortgage is making sure you have a substantial amount of money for your deposit. This usually equates to about 5% of the property worth, so a house worth £350,000 would require a deposit of £17,500. This will show the lender your ability to save and manage money, as well as being prepared to enter the property ladder.

Similarly, a strong credit score will reinforce a lender’s confidence in you and prove that you have a long history of staying on top of your finances. If you’re a business owner, you have to check both your personal and your business credit records. Before you let a lender credit check your history, make sure you don’t have any outstanding debts to pay, and double check for mistakes or errors that can be rectified.

How to prove your income

As already mentioned, it’s usually a good idea to provide a lender with two or more years’ accounts. These should be assembled and organised by a chartered accountant, which will assure the lender of their accuracy. You should also be ready to explain any fluctuations in your income, especially if there was a time you were earning considerably less than usual. Your income information is found on SA302 forms, as well as a “tax year overview”, both of which the HMRC can provide you with.

You can also consider taking your mortgage needs to a private bank, especially if you want to borrow more than £500,000. This is because private banks take a more flexible approach when measuring income, and will look at your assets and other sources of income as well.

Keep in mind that when you’re not trying to get a mortgage, accountants work with self-employed individuals to keep their taxable income down. While this is a positive thing when you’re paying taxes, it can hurt your chances when looking for a mortgage.

Retained Profits

If you are the director of a limited company, you might face additional challenges. For example, retained profits, which are earnings you want to keep in your business rather than take out for income or dividend purposes. While some lenders will take retained profits into consideration, most will not and this can affect your chances of securing a mortgage.

Here is where a mortgage broker can be invaluable. They can help you find lenders who include retained profits in their calculations. Mortgage brokers are a good idea for all self-employed individuals—it’s almost always a free service (lenders pay the broker’s fees) and they help you locate lenders who are accustomed to giving mortgages to self-employed people.

Will you pay more?

For the most part, the cost of your loan won’t be much more than anyone else’s. However, if you only provide your lender with one year of accounts, you should expect a price hike. Last year The Guardian found that Precise and Kensington were charging over 2.5%, even with a 25% deposit, which is almost twice what the Post Office offers at 1.33% for a two-year fix.

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