Mortgages can be daunting at the best of times, but when you are self employed, securing a mortgage can feel like a real challenge. But it is definitely possible! Check out this post to get an introduction to some of the steps you can take to prove your financial security to a mortgage lender.
Why is it more difficult to get a mortgage if I’m self-employed?
It is important to remember that a mortgage is just another loan, just… a really big one. And the most important thing that a lender wants to know is that you are going to be able to meet those repayments. If you’re self-employed, you may not have a regular income or contract of employment, which is what most people rely on to demonstrate their financial security. Don’t despair, though! It is still possible to get a mortgage if you are self-employed and there are other ways to assure lenders of your reliability.
Before applying for any mortgage, it is strongly advised that you seek professional advice first. If you apply and are unsuccessful, it will damage your credit score, making any future applications even harder!
Getting a self-employed mortgage
First off, if you’re self-employed you’re going to be applying for the same mortgages as everyone else - there is no ‘Mortgage for the Self-employed’ (sorry!). As aforementioned, the difference will be what you have to provide to meet the lending criteria and evidence of your income.
What you’ll need
In terms of meeting the financial criteria for a mortgage, you are going to need to get your hands on a few SA302 forms. This is your alternative to the payslips which most people would be using to prove their income. An SA302 form allows you to declare your earnings to HMRC and will show your annual tax calculations. You’ll normally need three of these to sufficiently prove your income to a mortgage lender. If you’re a contractor, you should include evidence of upcoming contracts to bolster your financial assessment, and similarly if you are a director, evidence of dividend payments.
To demonstrate the state of your finances, you’re going to need certified accounts which requires an accountant. Although this is an added expense, there are some lenders who won’t accept applications from self-employed applicants who don’t have certified accounts.
Deposits are used by lenders as security for a mortgage and the greater the deposit, the more likely it is that your application will be accepted and the mortgage given at a good rate. If other of your application are slightly weaker, for example if you only have two SA302 forms or you don’t have such a long history of certified accounts, then a larger deposit could offset that risk in the eyes of the lender.
Watch your spending
It’s a good idea to check your credit rating before you apply and do all you can to boost it, including paying off any debts you can and registering to vote (which helps lenders access and verify your details). Bare in mind that a mortgage lender is going to be looking through your accounts to see if you seem capable of meeting repayments, which means understanding if you have your finances in order and what your spending habits are like. It may be worth postponing any big purchases but in the long-run creating and managing a sustainable budget is only going to help you, in all aspects of your life! If you want help setting one up, check out our post on creating a sustainable budget here.
You may have heard of self-certification mortgages as being an option for self-employed mortgages and a way to avoid some of the hassle mentioned above. Don’t go hunting for them however, as they were banned in 2014 due to concerns mortgages were being given to those who can’t afford them.