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How to Qualify for a Mortgage as a Self-employed Individual

Getting a mortgage can be challenging, especially if you’re self-employed. Lenders are more reluctant to lend as it’s difficult to prove an income. They will almost certainly want additional documentation, higher deposits, and they’ll offer fewer deals.

However, many self-employed people take home more than their declared income because declared income includes write-offs. That means you may be better able to afford a mortgage than the lender thinks.

If you want to qualify for a mortgage as a self-employed individual, you need this guide and our mortgage advice service. We’re here to help.

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What are the mortgage requirements for self-employed individuals in the UK?

Mortgage companies consider you self-employed if you own over 25% of the business supplying your primary income. Being classed as self-employed means you may lose access to traditional 25 or 30-year mortgages.

If you’re considered a high risk you’ll be asked for a bigger deposit, may have your lending capped, and may have to repay over a shorter period. If you’re a standard risk you should be able to access the same terms as a traditional employed mortgage. However, there are specific criteria you’ll need to meet:

  • Two years or more of self-employed income which can be verified by tax returns and possibly bank receipts. Some lenders require three or more years of accounts
  • A good credit score
  • Low debt-to-income ratio. Lenders like this to be below 36%, over 50% you won’t be considered
  • Documentation for upcoming work and earnings if relevant

Assessing mortgage affordability for self-employed individuals

Mortgage affordability is simply a calculation based on your income. Most lenders will offer between three and five times your net profit.

Self-employed people need to prove their income via submitted tax returns. These can be verified with the tax office and bank statements can also be used to confirm earnings. The more accounts you can provide the greater your financial stability will be, provided those accounts show consistent profits.

Alongside years of accounts and bank statements, having a low debt-to-income ratio and money in savings will help you qualify for a mortgage.

Organising your finances and documentation

For a lender to have confidence in you and your application they need accurate and up-to-date figures. Your lender can’t tell if you are earning good money today from accounts that are two or three years old. Having your accounts up-to-date, even mid-year will help to convince the lender you’re professional, reputable, and trustworthy.

To prove your income, you’ll need:

  • Tax returns showing income, expense, and net profit – you can use the SA302 supplied by HMRC
  • Bank statements to confirm self-employed receipts
  • If you’re a director of a limited company you’ll need to show the filed accounts

To make your application as simple as possible summarise your income, expenditure, and any debts in a spreadsheet. This will allow the lender to see your info at a glance. The tax returns and other items are simply supplementary documentation.

Mortgage interest rates and calculations for the self-employed

It’s important to understand the interest rate will be offered depending on how reliable you appear to be. If you have a good credit score without defaults and missed payments, lenders will consider you a safe bet. That means they’ll offer you the lowest interest rates and the best possible terms.

In contrast, a poor credit score, lack of documentation, or a high debt-to-income ratio will make you a high-risk borrower. Lenders that are prepared to give you a mortgage offer will have higher interest rates and possibly require a larger deposit.

Alongside keeping your accounts documented and up-to-date, you should make sure you have a strong credit score:

  • Don’t apply for loans just before applying for a mortgage
  • Check your score regularly to ensure there are no errors
  • Avoid defaulting or missing payments
  • Pay down your debts
  • Pay business expenses with a credit card – but make sure you repay the balance in full every month
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Strategies for mortgage approval as a self-employed person

If you’re self-employed and looking for a mortgage the following will boost your chances of approval:

  • Get professional help - The professionals, that’s us, can assess your situation, confirm the likelihood of you being approved for a mortgage, and direct your application to the right lender. In addition, advisers can help you find the best mortgage option on the market, so it’s worth contacting us today. 
  • Plan ahead - You need two or three years of accounts/tax returns. If you haven’t been trading that long, consider waiting to apply for a mortgage. In both cases, document all your income and expenditures now and create a financial plan which will help you secure the best possible position for a mortgage in the future. We can help with this. 
  • Reduce debt - Create a plan to reduce your debts and stick to it. You’ll be a lower-risk mortgage applicant which will work in your favour. 
  • Check your credit score - Regularly check your credit score to ensure there are no surprises. It doesn’t damage your score and will help you resolve any issues before you apply for a mortgage. Even though there are ways to get mortgage with bad credit the aim should be to have a good score.
  • Save for a deposit - Whether a lender wants a big deposit or not, the bigger your deposit the easier it will be to get a good deal. It will also reduce your monthly repayments, making it more affordable.

Exploring specialist lenders and mortgage options

Most mortgage brokers and companies will offer a range of products for self-employed people. The products are effectively the same as for employed people. The main difference is the interest rate and other terms may be different depending on your documentation.

However, there are some businesses which specialise in providing mortgages for self-employed people. These specialists will have a deeper understanding of the options available and how to tailor your application. In short, they should be in a better position to help you secure a mortgage.

Additionally, independent mortgage advisers, such as Moneysprite, can access all the products on the market without bias. It ensures you have access to the best deals.

We can also talk you through the different options, including variable rates, trackers, and fixed rates.

Seeking professional advice

The mortgage application process for self-employed people is more complicated than for employed people. To ensure you have all the information you need and get the best possible advice, you should get professional help.

That’s what we’re here for. We can ask you all the questions and assemble all the information needed. We’ll then handle the application process, keeping things as simple as possible for you. After all, you have your own business to run.

It’s not just our knowledge that will help you, we offer a personalised service. Our solutions are designed specifically for you, to help you get the mortgage you need and deserve.

Saving for a larger deposit

Saving as much as possible for your deposit can help your application. The greater your deposit the lower the amount of funds you’ll need to borrow. For a mortgage company, their risk will be lower. It’s easier to recoup their money if the mortgage is 50% of the value of a house compared to 95%.

You can boost your deposit savings by:

  • Reducing your personal and business expenditure wherever possible
  • Saving a set percentage of every completed and paid job
  • Taking on a second job, perhaps offering consulting services
  • Consider selling unneeded equipment/assets

Summing up

It’s more complicated to get a mortgage as a self-employed individual. However, it’s not impossible. You simply need to be more organised. Our specialist team can help, contact us today for an initial consultation.

If you need help with your mortgage, call us today: 0345 450 4660

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