How Hard is It to Get a Mortgage for The Self-Employed?
Officially, if you own 25% or more of a business then you’re classed as self-employed. Once a self-made company is really taking off, naturally the next thing to think about is getting yourself a nice new house. But wait, can the self-employed get a mortgage? How much of a loan can you get? How hard is it to get one? Don’t panic, the self-employed can get just as much of a mortgage as the employed, there are just a couple more steps to go through before getting there.
Why are They So Difficult?
Indeed, mortgage loans for the self-employed, freelancers and contractors used to be more easy to come by. Before the credit crunch of 2007, self-certification mortgages allowed property hopefuls to apply for mortgages without having to provide billions of pieces of paperwork. Intended for the use of self-employed workers, along with freelancers, contractors and business owners, debtors could tell lenders how much they earned (self-certify) instead of providing bank statements or payslips. Unfortunately, this system was abused, and many exaggerated their income, leading to the Financial Conduct Authority (FCA) banning self-cert mortgages.
As a consequence, the self-employed now need to verify all income to get a mortgage. But don’t fret – it’s not impossible. It’s actually well known that self-employed house seekers can get just as much of a loan as the employed.
Before a lender will accept your mortgage application, you will need to prove how much you earn. This is because loan providers need to be assured that you will be able to repay the loan. If you can’t, it may result in your home being repossessed and no one wants that. This is where it gets slightly more difficult for the self-employed. As the employed simply hand over a set of their latest payslips, the self-employed will need to provide two or three years of up-to-date accounts – verified by a certified accountant – or self-assessment tax returns, if they are a freelancer. The self-employed will also need to prove their tax affairs are up to date via HMRC tax overviews. Despite this, occasionally lenders may accept one year of accounts and future predictions.
Ways to Improve your Chances
Chances of getting a reasonable loan amount can be aided by proof of a growing income. If you can provide two- or three-years accounts showing that your business is growing consistently then this eases the mind of the lender. Decreasing profits really won’t benefit your application. A clean credit record & well managed accounts also play into your favour.
Keeping all business paperwork, accounts and electronic records can also improve your chances of getting the best loan deal. Again, having an accountant check over these is a must for the self-employed. Knowing what you’re taking about with your financing will boost your likelihood.
For freelancers, completing a self-assessment SA302 tax form is the easiest way to prove your income to potential lender. Remember, more income equals higher loan.
How long you’ve been trading is also essential in deciding how much a mortgage provider is able to offer you. Traditionally, the longer you wait before applying for a loan is better. You will have more accounts and work history as evidence of income as well as being able to save a sizable deposit.
Types of Self-Employment
When considering the difficulty of gaining a mortgage as a self-employed worker, it is important to think about the different types of self-employment. Your, or your business’, legal status will impact upon how much loan you are able to receive. For sole traders and partnerships, lenders will look at the net profits when deciding how much loan is available. This differs, however, for limited companies. Usually, it will be the director of a limited company who will need to apply for a “self-employed mortgage” but will be able to use salary & dividends. Some lenders even include retained profits in your company as part of your wages.
Although it may be difficult for the self-employed to get a mortgage, there are ways to improve chances and secure a loan to match the employed. Ensuring up-to-date, accountant-checked accounts are available, as well as a healthy deposit and good credit history is crucial. Searching for the right deal is also key. Mortgage brokers can help with this.
It may be a little harder but being a business owner and a home owner is not impossible. You just need to be able to substantiate all income that you want to be considered.