Essential Guide to Self Employed Mortgages
Whilst being your own boss has its upsides, one of the drawbacks is that it can be trickier to get a mortgage.
Right or wrong, mortgage providers prefer the predictable, consistent income enjoyed by people in full-time jobs. And despite the often precarious nature of employment, an employee represents a lower risk for the lender's security.
Nonetheless, getting a mortgage if you're self-employed doesn't have to be complicated. Before buying a property, seek specialist advice from an experienced self-employed mortgage broker. Their understanding of lenders' income requirements and eligibility criteria are key to getting a great deal.
Can I get a self employed mortgage with 1 year's accounts?
Absolutely. Whilst it's fair to say getting a mortgage with just a single year's books is trickier than if you have two, there are still a few lenders happy to consider it.
Your year one accounts and self-assessment tax return must have been submitted to HMRC and lenders will want to view your business bank statements for the last 3-6 months of trading.
Some lenders additionally ask for a signed letter or form from your accountant outlining your financial projections for the current year.
Is it possible to get a mortgage without any accounts?
No. There are currently no providers willing to lend if you're newly self-employed, and yet to complete your first year's company accounts.
However, if you're coming up to your year end, get in touch. We can source you a competitive mortgage deal as soon as your accounts are submitted to HMRC.
How much can I borrow?
The maximum amount you can borrow to buy a property varies between lenders, and depends on your circumstances. Many are happy to lend at a multiple of 4.5 x single or joint earnings.
A few lenders will only go up to 4 x income, whilst others will work to a multiple of 5 or even 6 for high earners and/or those working in professional roles, such as doctors, actuaries, architects and solicitors.
It's important to remember the income multiple is a maximum borrowing amount. Before applying for a mortgage, consider whether you actually need or want to borrow the maximum amount a lender will permit.
The importance of reducing credit commitments
Mortgage companies will investigate your spending habits thoroughly, by checking bank statements and running credit checks.
An area of spending they particularly focus on, is what's known as 'committed expenditure'. In other words, any payment you are locked into, for a period of time.
Credit commitments are a good example, and any unsecured loans, car finance or credit card debts could affect how much you can borrow, or even whether you can borrow at all. So if you can reduce or clear them before applying for a mortgage, it's a good idea to do so.
There are many other types of committed expenditure, including spousal support, child maintenance, and school fees.
What mortgage deals are available to the self-employed?
The same deals as those for employed applicants. One or two loan providers have dedicated self-employed mortgage ranges. But generally, the same products are available, regardless of employment status.
What's different is the way a self-employed person's income is assessed for a mortgage, and the length of time they need to be trading for is longer than someone needs to be in an employed position.
How is my income assessed for a mortgage?
How your income is assessed will depend on the lender's criteria, and the structure of your business. But these treatments are very common:
Sole Traders: net profit
Directors: salary and dividends
LLP equity partner: share of LLP net profit
Contractors: Day rate x number of days worked a week x 46 weeks
Not all lenders use the same methodologies. For example, some banks and building societies will consider a director's salary and net profit (after corporation tax) rather than salary and dividends. Which could allow you to borrow more. One or two providers are even happy to use pre-tax net profit, or salary, dividends, and retained profit.
Some mortgage providers use 48 weeks of work for contractors, though either 46 or 48 weeks is conditional on the contract actually specifying that many weeks work. Lenders will use the actual number of contracted days, where it's fewer.
Visit our documentation checklist guide to learn what paperwork you'll need before applying for a self-employed mortgage.
I have bad credit. Can I still get a mortgage?
Getting a self-employed mortgage with bad credit is entirely possible. Ultimately, banks, building societies and non-mainstream lenders are all concerned with:
the nature and severity of the adverse credit
how long ago it occurred
the value of the adverse credit event
whether the debt was satisfied or agreement was reached to settle the debt
What forms of poor credit will lenders work with?
Each mortgage provider has its own tolerance for risk, and will set criteria accordingly. Many lenders will consider milder forms of bad credit such as a single, low-value, satisfied default, a late payment on a mobile phone bill, or even a satisfied CCJ.
Where it becomes more difficult is with the following types of adverse credit:
recent, multiple missed or late payments or arrears
unsatisfied defaults or CCJs in the last year or two
high value, defaults or CCJs in the past year or two, even if satisfied.
more severe bad credit like ex-bankruptcy, IVA or a Debt Management Plan (DMP).
a previous repossession
missed mortgage payments
Even then, we have access to specialist, adverse-friendly mortgage providers willing to consider each case on its merits. And lenders as a whole have become slightly more flexible over the years with people who have a low credit score.
Getting a self-employed mortgage quote
If you're ready for a mortgage or remortgage quote, or simply need advice, please call us on 07904 158233 or email us at hello@saltwoodfinance.co.uk
We scour thousands of mortgage deals to find the most appropriate product for your circumstances, eliminating the risk of ending up with an inferior deal. We can also save you wasting precious time, attempting to find a suitable deal by yourself.