A question that we get quite often get at Mortgage Squared is ‘How do those that are self-employed go about getting a mortgage?’.
It gave us the idea of writing an informative blog to show you how you can maximize your chances of getting a mortgage when self-employed.
Because self-employed income is often less predictable and can also be less secure than a salary, lenders will need more reassurance that you can afford the repayments. When it comes to being self-employed and wanting a mortgage, being prepared is key.
Some brokers will tell you to begin the process at least 6 months prior to applying to give yourself a fighting chance but this all depends whereabouts on your business journey you are at. It is very possible to acquire a mortgage with two years accounts and believe it or not, there are some lenders that will lend with only one year of accounts.
Below are some ways you can maximize your chances of getting a mortgage when self-employed:
Use a broker that understands how self-employed mortgages work
Do your research and find someone that has a good track record in finding mortgages for self-employed people. Brokers with experience can anticipate problems in advance and they will also know what lenders will be more likely to accept your application from the whole of the market.
Like most things, its best to get it right first-time round. Although one decline is unlikely to harm your credit rating, a few attempts might. Finding a mortgage broker who knows what they are talking about increases your chances of being approved first time.
Evidence at least two years of accounts
To give yourself the best chance of getting a mortgage you will need to provide two years accounts. If you are at all confused with the accounts side of the process, then asking your accountant to ensure they meet the required standards and they can explain the accounts to you for future reference is sensible. With this being said there will be a small proportion of lenders that will consider 1 years accounts and sometimes even 9 months so long as you have accounts from a qualified accountant drawn up year to date, the lenders can consider offering the mortgage before the full first year is complete.
Some lenders will ask you to produce a SA302 form (confirmation from HMRC of the income you have reported to them). These can take a little while to get to you so be aware of this and request them as soon as you can. Some lenders may also ask you to evidence some recent tax returns.
Not all lenders require the same information
The bottom line with mortgages is that lenders have different criteria, some have different rules and regulations to go by, some will accept what others don’t, one lender may consider your earnings to be most important while another may base their decision on earnings and your background. It is always best to know these kind of obstacles before you go charging into getting a mortgage when self-employed because is buffers the knock-back you may get if your application is rejected, brush yourself down and work with your broker to find you the best lender for your circumstances.
Is your spouse employed?
This doesn’t always apply to all self-employed because not everyone has a spouse but it’s always good to know. If your spouse is salaried rather than self-employed then it would make sense to have them as the first name on the mortgage. This can give you a better chance of your application being approved. The fact that it is a predictable income could count in your favour.
Understanding why it is harder to get a mortgage when you have been self-employed for a short time.
Knowledge is key as always. The reason why being self-employed can make it difficult to get a mortgage is because the lender may find it hard to establish how much you earn, and therefore the risk increases of you not being able to pay this back. The rule of thumb is that if you have been self-employed for a longer period of time you would considered by most lenders, in the same way as an employed applicant.
Having the required accounts and documentation, having a broker to guide you through the process without the stress of doing it alone and being prepared will work in your favour through this process.
Retain more income
Obviously when running a business, it is common sense to retain as much profit as possible but when applying for a mortgage this can be used in a different manner. Paying yourself a higher dividend of the profits can boost your application and should also enhance your savings so you can afford a larger deposit. Once you have your new home, you can readjust your income if you wish, so long as you can still afford the repayments and other outgoings. We would always recommend talking to your accountant about this.
Don’t make any rash changes to your business
Lenders will always look for stability within your business. Try not to make any huge changes within the structure or changes within what you specialise in as it could hinder the process before applying for a mortgage. Lenders want to be confident that whatever you have chosen to do is going be sustained. If it can’t wait, then it would be sensible to wait till the changes have had chance to settle so you are showing that the business is still stable and able to keep generating money.
Knowing about deposit bands is a useful tip for anyone that is applying for a mortgage, but it can make an even bigger difference when you are self-employed. A larger deposit usually means lower repayments. Typically, 10%, 25% and 40% deposits make rates even cheaper. Being close to one of these bands could mean that if you raise a little more money than you would get past the band and obtain a lower rate. Putting in the extra effort to hit these bands can be well worth it.
Having a connection between employed and self-employed
A lender will look at the connection between what you were doing when you was employed to what you decided to do now that you are self-employed. If the two have a connection i.e you have gone from working within mortgages to be a mortgage broker, then the lender will take this into account. They will be satisfied that you have the experience you need to sustain the business and hit projections.
Know the different mortgages for different company types
As we know mortgages are mortgages, you are offered the same whether you are freelance, employed or a limited company. Below relates to the evidence of income that you must provide:
Sole trader Mortgage
Some lenders will only need to see one year’s trading history, some will need two years and others will want you to evidence three years. The more evidence of successful trading that you have, the more lenders your mortgage advisor can consider.
Limited company Mortgage
If you operate as a limited company, your income probably consists of a salary and dividends. Lenders will need to consider both as your income. In some instances, lenders may be able to use your operating or net profit in addition to your salary.
Lenders will assess your income according to your share of the profits.
When looking into getting a mortgage while self-employed the best way to approach the whole thing is do your research. Always confide in a broker that has a good track record of helping other self-employed gain a mortgage. Know your stuff when it comes to documentation, always be one step of the game and understand what is needed when it comes to applying.
If you are reading this and thinking that getting a mortgage while self-employed is a mine field, then give us a call and we will be more than happy to discuss a mortgage for you further 01202 016755