What are mortgages for self-employed individuals?
A self-employed mortgage is a loan designed to accommodate individuals who run their own businesses or work as freelancers and have income that is not typically documented through traditional payslips.
Self-employed borrowers are required to provide alternative forms of income verification, such as tax returns, bank statements, and other financial documentation, to qualify for a mortgage. These mortgages are tailored to assess the creditworthiness and income stability of self-employed applicants so they can finance the purchase of a home.
Factors assessed by lenders when you’re a self-employed mortgage applicant
1. Self-employment status. If you’re a freelancer, sole trader, entrepreneur, independent contractor, or small business owner, you must prove that you are self-employed or have your own business.
2. Income documentation. You must provide detailed proof of income, such as tax returns, for the past two or more years to establish a consistent income history. Lenders may also request profit and loss statements, bank statements, and other financial records.
3. Business profitability. Lenders typically look for a track record of stable or growing income from your self-employment. If your income has been fluctuating significantly, it may affect your mortgage application's approval and terms.
4. Creditworthiness. Like any mortgage applicant, your credit score and credit history will be evaluated. Maintaining a good credit score is important for securing favourable mortgage terms.
5. Debt-to-income ratio (DTI). Lenders will calculate your DTI ratio to assess your ability to manage your mortgage payments. They will consider both your personal and business-related debts when calculating your DTI.
6. Amount of deposit. You'll need to have a sufficient deposit for the property you intend to purchase. This can vary depending on the type of mortgage and the lender's policies.
7. Mortgage options. Self-employed individuals may have access to a variety of mortgage options, including conventional loans or specialised self-employed mortgage programs. It's essential to explore these options to find the one that best suits your financial situation.
8. Tax returns. Lenders may request copies of your SA302’s and tax year overviews to verify your income.
9. Business structure. The legal structure of your business (e.g., sole trader, partnership, limited company) may impact how your income is assessed by the lender.
10. Nature of business. Some lenders may subject industries to additional scrutiny. If your business belongs to any of those, you may encounter more stringent income verification requirements and may need to provide additional documentation to demonstrate the stability and profitability of your business.
Tips for a successful mortgage application process
Lenders typically assess a mortgage applicant’s earnings based on the past two years of income. However, many are willing to only consider the most recent year and ignore whatever loss you had two years prior as long as you can prove that your business is now growing.
Lenders are interested in working out the best deal for you if you can provide them with complete certified documents. A qualified accountant can best prepare your financial statements and documents, and ensure accuracy on every financial record that you submit.
Your lender may offer you a very attractive rate, however, they may not divulge all the additional fees involved. To prevent this, a mortgage broker can secure all the information from the lender for better transparency.
Not even a very high income can attract a lender if you have large outstanding debt. Make sure that you boost your credit history and pay all your loans and bills first before applying for a mortgage if you can.
Shop around for the best rates that can fit your financial situation. A mortgage broker can help you out with this so you won’t miss the ideal lender that will work out with your needs.
The larger deposit you can provide, the less money you need to borrow. Always ask your lender how this can help you benefit from more competitive mortgage rates.
Your financial situation is more unique compared to a typical borrower. Your lender will ask for more documents before your mortgage application is considered.
The AIP is a written statement from a mortgage provider saying that, ‘in principle’ (i.e., ‘on the basis of the information you’ve provided’) they would agree to lend you a certain amount for a mortgage. An AIP gives you a good idea as to how much money you could potentially borrow so you know which properties fall within your price range, so when the time comes to put down an offer, you'll have no surprises in knowing what you can and cannot borrow.
If you’re taking out a joint mortgage, this will boost your chances since both incomes of you and your partner will be considered. However, you will still go through all the processes required of a self-employed borrower.
If you’re self-employed, it’s most likely that you won’t have time to search for the most competitive mortgage rates. A mortgage broker can help you look at each deal available and offer advice to successfully get a mortgage.
Frequently Asked Questions (FAQs)
Self-cert mortgages were phased out in 2014 because of the abuse in the industry that involved granting mortgages to borrowers who could not afford them. As a self-employed prospective borrower, you need to submit the same requirements for a mortgage just like any other applicant.
Lenders will ask for your proof of share of the profits in the company, so the success of your application will depend on your earnings as well as other factors that can influence your ability to repay the loan.
You need a minimum of one year’s Accounts.
This form confirms the income you have declared to HMRC and proves your self-employed income. This is used by the lender in conjunction with the corresponding tax year overview which confirms the amount of tax owed on those earnings.
It depends on lots of factors including if you have stayed in the same industry as your employed position, if you have any guarantee of future income, and how long you have been self-employed.
You need to prepare your passport, driver’s licence, utility bills, bank statements, savings accounts, and other documents.
It depends on your lender. Some are willing to extend their services provided that you meet their lending criteria. It is recommended to settle any missed credit card payments and loan payments first to boost your credit score before applying for a mortgage.
Your income and size of deposit will be considered along with your ability to sustain the monthly repayments.
Yes, you can. Your self-employment status should not affect the type of property you can buy.
A mortgage broker will help you find the best deals based on your unique financial situation. Whether you’ve already spent decades running your business, or have just recently become a self-employed individual, you can be matched to the most competitive rates when you work with a mortgage broker.
Contact a mortgage broker today
The Mortgage Hut team provides expertise to help you assess your finances and offers tailored advice to increase your chances of remortgage approval. With access to diverse mortgage products, our advisers can guide you toward the best choices for your financial profile.
Speak to a remortgage adviser today by calling us at 02380 980304. You also email us at info@themortgagehut.net, or book an appointment through our contact form.
