How Long do you Have to be Self-Employed for Before Getting a Mortgage?
Since the 2007 credit crunch, getting a mortgage can be a bit of a nightmare. This is felt most heavily by first-time buyers and the self-employed. Most of the time, being self-employed is great. You can do things at your own pace, be your own boss. You are (nearly always) the sole profiteer of your business, meaning the money is yours to do with as you please. Unfortunately, this may not be so great when you’re looking for a mortgage. Especially your first mortgage.
With the removal of self-certification mortgages following the 2007 credit crunch, self-employed house-hunters are suffering when looking for a lender or a sizable loan. A self-cert mortgage allowed borrowers to simply tell the provider what they earned, instead of having to evidence income in the form of bank statements or payslips. This type of loan was specifically designed for the self-employed, freelancers and contractors and applications were usually fast tracked with minimum background checks. However, many abused this system and exaggerated income statements were frequent, leading to bigger mortgage loans that were struggling to be repaid. Now, the self-employed have to apply for mortgages the same way as the employed – which is difficult but not impossible. There is no such thing as a “self-employed mortgage”, just more steps to a normal mortgage need to be taken by the self-employed.
So, How Long Then?
One of the main things self-employed property hopefuls want to know is; “how long do I have to have been self-employed before I can apply for a mortgage?”. Typically, most mortgage lenders will want to see two or three years of practise before agreeing to lend you the large sum of money. This will have given the business enough time to gather two years of accounts or self-assessment tax returns. As well as this, waiting for a couple of years before applying for a mortgage can allow a nice, healthy sized deposit to be saved, which will help a lot when lenders are considering the application.
Almost all mortgage providers will want accounts to have been set up by a certified accountant, but it will be beneficial if you can understand the figures. This will help you to explain if your company went through a quiet period, for example, over the past three years of trading. Being able to explain this will be a great aid in solidifying the accounts to any self-employed mortgage lender. It is also pivotal that your accounts are up to date – no provider wants out of date figures.
A track record of regular work is also usually required. Many lenders wish to see that your facts and figures are correct by correlating them with previous work. As well as this, a healthy deposit will help convince providers to give you the loan – this is also aided by how long your company has been running. As previously stated, waiting a few years before applying for a loan can allow you to save a higher down payment, which means you will borrow less and hence pay back less in the long run. As well as this, most loan providers will require you to have at least 10% of the asking price of a property before even considering your mortgage application.
As well as a track record, some stricter loan providers may ask to see a prediction of future business and/or contracts to ensure that you will be able to afford the monthly repayments. If you cannot pay your repayments, your house could be repossessed. It is worth thinking about this before taking out a mortgage.
If you cannot prove your company has been running for more than two years, or if it a relatively new business, then some lenders may allow only one year of accounts if you provide company projections for future clients and contracts.. It is key to remember that these kind of providers are often hard to come by & the chances of your first year’s accounts being sufficient to meet the loan you require would be unlikely when set up costs etc for your new business are factored in. It may still be worth waiting until your company is more experienced.
What’s your Status?
Another thing to think about when considering how long to wait before applying for a mortgage as a self-employed worker is that lenders will offer different amounts of loan dependent on your business’s legal status. Whether you’re a sole trader, in a partnership or the director of a limited company will affect your potential mortgage amount. For sole traders and partnerships, lenders will check net profits as your form of incomes. Whereas with limited companies, loan providers will look at salary and dividends, or sometimes salary and net profit.
As the director of a company does not receive all of the profits of the company, depending on the size of the company it may be more beneficial to wait longer in order to save more towards a deposit. Lenders use income to determine how much of a loan you are eligible for, so the more money you make, the more loan you receive. So, another factor may be the size of the company on deciding how long to wait for applying for a mortgage. It is advisable that smaller businesses wait longer.
There is no set time to wait before applying for a mortgage. Although it is harder for the self-employed to get a mortgage, there is not evidence suggesting that they cannot get as much of a loan as the employed do. Remember not to not be hasty, let your business grow! Mortgages usually last a lifetime – ensure you’re ready before you commit.