How to get a mortgage when you’re self-employed

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Contrary to popular belief, there is no “special” category for self-employed mortgages. Freelancers, business owners and entrepreneurs can apply for the same mortgage products as everyone else.

Where independent borrowers often take off is proving their income.

While salaried borrowers can just show lenders their payslips, independent borrowers tend to have more irregular and complex incomes, so they need a way to prove their income.

Before 2014, it was another world for independent borrowers. Back then, you could “self-certify” your income; but in reality, you hardly needed to prove your income.

However, so-called “self-certified” mortgages were banned by the Financial Conduct Authority in the 2014 Mortgage Market Review, and since then every borrower has to prove income to get a home loan.

Essential documents

What lenders require from independent mortgage applicants varies. Typically, you will need to present certified accounts for two or three years, although a handful of lenders will accept one-year accounts.

You will also need to present proof of your income from HMRC records, either your tax return or Form SA302.

When determining how much you earn each year, lenders typically calculate your average earnings for the past two or three years. As with mortgages for job seekers, most lenders base their mortgage affordability calculations on the applicant’s net income (before tax).

Lenders may ask some independent borrowers for additional evidence to show that in addition to making money now, they will continue to do so in the future. For example, if you are a business owner, you may need to show proof of payment of dividends or retained earnings. If you are an entrepreneur, you might need proof of upcoming contracts.

How Affordability Works

Once you’ve proven your income, the mortgage affordability assessment for an independent applicant is the same as for any other mortgage. The lender will look at your income and expenses to assess whether you can afford the amount you want to borrow.

The appraisal will look at your bank statements to see what you’re spending your money on, so it’s a good idea to avoid frivolous spending in the six months prior to your application.

And you absolutely must avoid expenses that might appear to be a “red flag” to a lender, such as online gambling or payday loans.

As with any mortgage, the higher the deposit you have, the better your chances of acceptance and the lower the interest rate you will be offered.

Be accepted after the pandemic

Unfortunately, Covid-19 has made it more difficult for independent borrowers to accept a mortgage.

Some banks, such as NatWest, do not offer mortgages to self-employed people who have received money from the Self-Employment Income Support program. This is the case, even though their revenues were stable before the pandemic and their business is viable after the pandemic.

HSBC says borrowers who have received grants can be accepted, but none of the grant income can be used to support the mortgage application. This means that independent borrowers who used grants to replace their income during the foreclosure risk failing the bank’s affordability checks.

Another problem is that lenders typically use income from the past two (or three) years to assess affordability. Self-employed workers affected by the pandemic will likely have earned less than usual in the 2020-2021 tax year. Thus, this drop in income could affect their mortgage loan applications until 2023.

Critical changes

However, a few lenders have changed their lending criteria to take into account the pandemic.

Santander’s credit policy now updates the 2020/21 set of accounts for independent borrowers who have experienced an unusual loss of income. So, affordability will be based on how much you earned in 2019-2020 and 2018-19.

Meanwhile, HSBC is requesting business bank statements for January, February or March 2020 and the past 60 days to provide a view of pre-pandemic and current business conditions.

Other lenders, such as Nationwide, refer the majority of self-employed cases to an insurer who decides on a case-by-case basis what documentation is required to support the claim.

Consider a mortgage broker

Lender criteria change all the time, so a good mortgage broker can be worth their weight in gold.

Brokers will be aware of the loan criteria of different providers, as well as have knowledge of and access to small lenders happy to lend to independent applicants.

A broker will also know the best lenders to approach depending on whether you operate as an individual entrepreneur, in partnership, or in a limited liability company. They should also know which lenders offer the cheapest self-employed interest rates.

Boost your chances

Mortgage lenders generally want independent applicants to provide accounts prepared by a qualified chartered accountant. So, it may be worthwhile to hire a professional to do your books and your tax return.

With any mortgage application, the larger your deposit, the more options you will have. The lower your loan-to-value ratio (LTV), the more lenders will accept your request.

The LTV is the ratio of your mortgage to the purchase price of the property. LTVs can reach 95%. But the lower the number, the better the mortgage rate and the cheaper the repayments should become for the borrower.

Potential borrowers can also increase their chances with a good credit score. Being registered on the electoral roll, having a history of paying bills and debts on time, and not taking out too many loans, each contributes to the success of a mortgage application.

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