Self-Employed Mortgages
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Getting a mortgage when you work for yourself might seem tough, but it’s not impossible. More people are working for themselves these days, and lenders are offering options for those who are self-employed.
The hard part is showing you have a steady income. Traditional lenders like regular, consistent pay, and may doubt the reliability of income from self-employment. They’ll typically want lots of paperwork to verify your income, such as tax returns, business accounts, and bank statements.
Is it hard to get a mortgage if I’m self-employed?
If you are taking the step toward becoming self-employed, you may have heard that it’s hard to get a mortgage. However, if you’re organised, it’s not as hard as you think it may be.
When you are self-employed your earnings can change month to month. Getting the paperwork together is also a lengthy, time-consuming experience.
You have to prove to the lender that you can earn enough money to pay the mortgage for years to come. They will look closely at your documents to make sure you can keep up with payments.
Speaking to the right mortgage broker will help you better understand exactly what you need for your mortgage to be successful.
How many years do you need to be self-employed to get a mortgage?
Most lenders will need to see at least two years’ worth of earnings. This is to determine that your business, and your income from it, is sustainable. Using a qualified accountant is advisable.
Some lenders might accept applicants who have been self-employed for just one year, but there aren’t as many options. Showing strong evidence of steady income makes lenders more likely to approve you for a mortgage.
What proof of earnings is needed for a mortgage if I’m self-employed?
The longer you have been self-employed for, the easier it is to secure a mortgage. This is because you have more income history for lenders to work off.
Before applying for a mortgage, make sure your financial records are in order. This includes up-to-date business accounts, tax returns, and bank statements. The more organised and clear your financial records are, the smoother your application process will be.
Sole trader
Lenders will look at your tax calculations and corresponding tax year overviews. These documents evidence your profit after expenses but before tax, and confirm the amount of tax and National Insurance due or paid in that tax year.
If your income is increasing year on year, they will typically take an average of the last two years’ figures. Alternatively, if your income has dropped in the most recent year, they will use that figure on its own.
Limited company director
If you are a limited company director and you own more than 20-25% of the business, you will be seen as self-employed even though you are also an employee of the business.
Some lenders will look at your salary and dividends, as declared on your tax documents, whereas others can look at salary and your share of profits in the company accounts.
Contractor
Lenders work out your annual income based on your day rate and a 46-week working year. You may have to have a year’s history of contract work and several months left on your current contract, or evidence of future contracts.
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How much can I borrow?
The amount you can borrow depends on your personal circumstances.
In addition to looking at your income, as mentioned above, lenders will also look at your expenditure. This includes credit cards and loans as well as things like childcare and maintenance.
Every lender uses a different calculator, so speak to an experienced mortgage advisor, who will be best-placed to help you.
I declare as little income as possible on my tax return; can I still get a self-employed mortgage?
Failure to declare all of your income can lead to serious implications, such as prosecution for fraud and tax avoidance.
Minimising your income for tax purposes will also affect how much you can borrow on a mortgage. Someone declaring £12,000 a year will not be able to borrow as much as someone with the same circumstances declaring £30,000 a year.
That said, you shouldn’t falsely inflate your income either. Doing so could put you in a position where you find it difficult to repay your debts. Remember, missing mortgage payments could eventually lead to your home being repossessed.
Do mortgage companies check with HMRC?
Yes, they can do.
HMRC operates a Mortgage Verification Scheme. This allows lenders to contact them to check if the numbers on the application form match what is on their records.
What deposit is needed?
The smallest deposit most lenders will accept is 5%. You may need a bigger deposit, for example if you have bad credit.
Putting down a bigger deposit than the minimum is usually an advantage, and can result in lower interest rates being available to you.
What documents are needed for self-employed mortgages?
In addition to the usual documents required, such as proof of ID and personal bank statements, you will have to provide income proof in very specific ways:
- Lenders will typically require tax calculations and tax year overviews for the past two years. Some may also ask for your tax returns.
- If you are a company director, you will need to send in company accounts.
- Contractors will have to provide copies of contracts and invoices.
Regardless of your situation, be prepared to provide at least three months’ worth of business bank statements, and more may be necessary for income verification.
It’s crucial to note that many lenders only accept income figures dated within the last 18 months. If your latest set of figures is over 18 months old, ensure you obtain up-to-date ones before applying for a mortgage.
How can The Mortgage Store Chorley help with self-employed mortgages?
At The Mortgage Store Chorley we help self-employed mortgage applicants of all types get a suitable mortgage deal. We have access to mortgage products that won’t be found with high street lenders and can ensure that you are making the most of your mortgage, regardless of your circumstances.
What’s more, we understand the additional supporting evidence required by each lender. We can help you prepare your business documentation before your application to encourage a smooth and easy process.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
