If you’re self-employed, getting a mortgage may not be as straightforward as if you’re an employee on payroll with a regular salary, but you can take steps to improve your chances of getting approved for one.
This article will explain what you can do to show potential lenders that you’re not a financial risk when it comes to a mortgage.
What classes as ‘self-employed’?
Mortgage lenders will want to know your employment status to consider your eligibility for a mortgage.
If you own more than 25% of a business, they will regard you as self-employed. This won’t just apply to sole traders running a small independent business but also to directors of limited companies.
How to get a self-employed mortgage
Until recently, you would have to undergo affordability checks to determine whether you could afford a mortgage.
The Bank of England has recently decided to scrap a key affordability check to help self-employed and freelance workers increase their chances of being accepted for one.
The decision removed the requirement for borrowers to prove they could afford the 3% rise in interest rates before being approved for a home loan, given the cost of living crisis.
Now, individual lenders will have to decide whether they wish to change their lending practices or continue with some form of affordability checks.
The scrapping of affordability checks aims to provide greater flexibility for potential borrowers with a lower income but a solid credit history and years of experience with punctual rent payments.
That being said, you’re likely to still have to prove some sort of income, and as you won’t have regular payslips as a self-employed worker, you need to know how to demonstrate your income.
The Bank of England is also keeping another important affordability check, which limits most new mortgage lending to a maximum of 4.5 times a borrower’s income.
What you need to secure a mortgage
To prove your self-employment income, you’ll usually have to provide two or more years of certified accounts and your self-assessment tax return forms as well as a tax overview from HMRC for the past two or three years. Some lenders will only ask for a year’s worth of information, but options will be limited.
If you’re a contractor, you’ll need to provide evidence of any upcoming work you have scheduled so the lender can see you have reliable sources of income.
For company directors, you’ll be asked to provide proof of dividend payments or retained profits.
As well as proof of income, a lender may ask you to provide any bank statements which will give them an overall view of your financial habits. These will give the lender a picture of how reliable you are when meeting your payment obligations.
Not only that, but you’ll probably undergo a credit check. That’s why it’s important to make sure you haven’t got any outstanding loans with late payments or defaulted credit cards.
If you already have a mortgage, you should make sure your payments are up to date, as this will increase your chances of getting a better mortgage and even a standard variable rate.
A good first step to finding your mortgage would be to secure the services of a broker, which will help you access the market.
How to improve your chances
Having a solid credit history is one way of bolstering your chances of being approved for a mortgage.
Another good way of making yourself seem reliable to a lender is by putting down a larger deposit. The more you pay upfront, the less you’ll have to borrow. The most important thing for a self-employed person looking to find a mortgage is to understand what they’ll be able to afford. This will allow you to set a financial target to work towards.
Mayflower can help you manage your finances to make yourself more appealing to mortgage lenders and brokers. With careful tax planning and budgeting or forecasting, you’ll be able to save money to make that deposit payment and paint a picture of yourself as a financially-reliable worker.
If you need help with your self-employed mortgage, Mayflower can help you alongside a good broker to help you find the best deal.