Self employment and mortgages: Top six questions answered

Property Reporter
2nd April 2021
Mortgage Search 339

Ask anyone trying to get a foot on the housing ladder "How's it going?" and they'll probably explain how hard and complicated the process is. From finding somewhere they like, in the area, they like to saving for a deposit and securing a mortgage.

It is to be expected. The traditional stumbling blocks are nothing new and usually can be overcome in time. However, for around one in six self-employed, the stumbling blocks can become a wall, simply because they run their own business.

Doing what you love should not stop you from buying the house of your dreams, and constantly being rejected for a mortgage can affect your mental health. New research from Haysto found that 31% claim they were left feeling depressed, while 29% state they were treated unfairly.

A further 15% of sole traders, and 14% of directors of limited companies, say they were turned down because of their job role and despite record levels of mortgage applications, the number of rejections is also on the rise.

Below are six answers to the top questions for getting a mortgage as a self-employed person to help you on your way

Can I get a mortgage if I’m self-employed?

Of course, you can! However, getting a mortgage as a self-employed person can be difficult as you must prove you have a reliable, regular, and stable income. The self-employed still have the same right to get a great mortgage deal like everyone else, it can just be trickier to get all your paperwork together, that’s all.

Who is defined as self-employed?

Being self-employed can fall into many different categories; freelancer, contractor, sole trader or maybe even a company director. There are a few different factors to consider depending on what kind of self-employed category you’re in. But lenders will categorise you as self-employed if it’s your main source of income, or you own more than 20 to 25% of a business.

How do I get a mortgage as a self-employed person?

You’ll need to give lenders evidence of your income. Lenders need to be able to know you can afford your mortgage before they lend you the money.

You’ll usually be asked for the following:

Two or more years’ certified accounts
SA302 forms or a tax year overview (from HMRC) for the past two or three years
Contractors need to provide evidence of upcoming contracts
Company directors need to provide evidence of dividend payments or retained profits
When it comes to self-employed mortgage applicants, lenders will prefer accounts prepared by a qualified chartered accountant. Having an accountant gives your self-employment validation, and makes you look more reliable and trustworthy to lenders. Lenders will likely focus on your average profit over the past few years.

You usually also need to give lenders these documents to prove your identity:

Driving licence
Council tax bill
Utility bills dated within three months
Six months’ worth of bank statements

How much can I borrow on a mortgage if I’m self-employed?

If you’re self-employed and meet the mortgage lender’s criteria then usually you can borrow 4.5 times your annual income. The maximum most mortgage lenders would let you borrow is 4.5x. Some lenders will consider offering 5 times your income and a small number of specialist lenders who will offer 6 times your income.

How can a freelancer strengthen their mortgage application?

Most mortgage lenders want at least three years’ worth of income history, but some might consider you if you’ve been freelancing for one year. They’ll always want enough ‘proof’ of income to make them feel happy to lend to you. Things like having contracts for future work could boost your application. You'll need an income history for at least a year, but a few more years will strengthen your application.

A freelance worker with years of experience and proof of income from this kind of employment will be in a better position than someone who has just started freelancing recently.

What advice would you give for self-employed first-time buyers?

Mortgage Applications for a self-employed first-time buyer can be more complex than if you were a first-time buyer in full-time employment. Having a good credit rating will absolutely help and so will having a longer trading history. Making sure your finances are in order and being able to provide a good deposit will also help you to have as many options open to you as possible. Most lenders will ask for a sizable deposit of 10% of the total home price.

For example, if the home you’re eyeing up costs £500,000 then lenders will ask for a deposit of £50,000. This means you’ll be taking out a mortgage in the region of £450,000 plus interest.

Paul Coss, Co-founder of Haysto commented: “Getting a mortgage when you’re self-employed can be difficult, as mortgage lenders tend to prefer people in full-time employment because it’s easy and simple to understand their income. Being self-employed, your income isn’t as straightforward, and people shouldn’t be penalised for that.

“Despite self-employed people usually earning more money than if they were on a salary, mortgage lenders just aren’t set up to deal with complex incomes. That’s why at Haysto we support people who are left to one side in helping make their dream of owning their own home a reality. There are five million self-employed people in the UK and this number is increasing due to COVID. We don’t think it’s fair that mortgages should be more difficult if you choose to earn your living this way.

"This is which why we specialise in getting mortgages for people who don’t fit the typical mortgage applicant mould.”

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