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

Money coach and founder of The Money Whisperer, Emma Maslin, shares her top tips for getting a mortgage when you’re self-employed.

In theory, everyone has access to the same mortgage deals, and is assessed against the same affordability tests. However, if you are self-employed, it can be more challenging to get a mortgage secured because you may be seen as a more of a risk by the lender.

While those in salaried employment can prove their income relatively easily with payslips and employment contracts, it can be harder for the self-employed to prove they have stable, ongoing income. Often, this means there are extra hoops to jump through during the mortgage application process, with lenders requiring more evidence of income or a higher deposit from a self-employed applicant to satisfy their risk assessments.

However, knowing what to expect and being well-prepared for a self-employed mortgage application should help you get access to the best deals and make for an easier process.

What are the requirements for a self-employed mortgage application?

For the best chance of a successful self-employed mortgage application, you’ll need to make sure you have:

• Proof of your earnings over the last couple of years
• Evidence of a history of consistent work and of future contracts
• Good credit history
• A healthy deposit

Proving Self-Employed Income For A Mortgage Application

Lenders assess the affordability of the mortgage loan you’ve applied for. They want to see that you can make regular repayments. In their checks, they review your income using:

• Your tax calculations and tax year overview, which you get when you fill in your self-assessment tax return. You can download your SA302 tax calculation forms yourself or ask your accountant to provide them for your application.

While someone in paid employment might typically be asked to provide just three months' worth of payslips to evidence their income, most lenders will require at least two complete years of accounts from someone who is self-employed. However, they will tend to take an average, so generally the more paperwork you can give a lender, the better.

Recent research by Superscript shows that as a result of the pandemic, the average income among a sample of 2015 sole-traders, freelancers and micro-business owners dropped by 15%.

If your profits have been impacted by COVID, or any other reasons, it’s worth providing more than two years of accounts to support your mortgage application. Alternatively, you may want to wait until profitability has improved to apply.

• Evidence of future contracts. In addition to current income, if you have contractually bound contracts for future work, these provide evidence of future earnings.

While many lenders will require a minimum of two years’ accounts, if you have recently become self-employed and don’t have this yet, it may still be possible to get a mortgage. In this instance, contracts to support future earning targets will form an important part of your application.

The Importance Of Your Credit Rating

To improve your chances of a successful application, make sure your credit report is accurate and, if needed, work to improve your credit score before applying. To do this you can:

• Check your records with the major three credit reference agencies – Experian, Transunion and Equifax – and make sure that everything is factually correct. In particular, you’re looking for any notices of reported bankruptcies, insolvencies and judgments that may be erroneous. If anything is incorrect, contact the agency to have the issues corrected as soon as possible.
• Make sure you are on the electoral roll (this is needed to check your residential status). If you aren't eligible to vote, send each agency proof of residency, e.g. utility bills or a copy of your UK driving licence.
• Pay down outstanding consumer debts or borrowing. Lowering your credit utilisation will have a positive impact on your credit score.
• Check that your current address is up to date and correct on all open accounts for all financial products.
• De-link your finances if you have split up with someone who you previously had a joint financial relationship with.

Build Your Deposit

It’s a good idea to put forward as much deposit as you can in support of your application. The best mortgage rates are reserved for those with the lowest loan to value (LTV) ratio. The larger your deposit compared to the amount you are hoping to borrow, the better your access to self-employed mortgage deals will be.

More importantly though, the bigger the deposit you have saved, the more likely the lender is to approve your application, as the risk is lower to them.

If you haven’t been self-employed for very long, you may find that mortgage lenders require a larger deposit. Knowing this in advance of an application can give you the time to build a bigger deposit before applying.

This is particularly important because of the impact of any rejected applications on your credit report. When you apply for a mortgage, if your application is rejected then it will likely appear on your credit report. For this reason, it can be worth working with a financial adviser or specialist mortgage broker on your application to give you a better chance of it being accepted the first time round.

This blog post has been written as part of our Business is Personal campaign, which explores what it's like to be your own boss at this moment in time.

If you’d like to find out what kind of boss you’d be, why not take our quiz and see what you get!