Mortgages for the Self-Employed – How Hard is it?
Self-employed people were able to apply for mortgages with relative ease for many years. The applicant could simply state their income from self-employment and their lender would trust this was the truth. Unfortunately many people took advantage of the scheme in the wrong way, applied for more than they could afford and made the system unmanageable and this meant, in 2011, the self-cert mortgage was banned and now self-employed people do have to go through a few more steps before they can secure a mortgage.
Many self-employed people work from contract to contract or on a freelance basis. This can mean income varies vastly from month to month. Basing your income on a “good” month is extremely dangerous when trying to get credit as making repayments becomes difficult in poorer months, mortgage affordability has to be worked out in a safe way.
How much can you borrow?
Most lenders allow people to borrow between four and six times their annual income. Higher multiples are often made available to those with professions which are known to come with quickly rising salaries such as those in the law or medical professional. For self-employed people, a lot of the calculation relies upon previous tax years and your accounts. You will need to provide evidence of your accounts for a number of years, which will change dependent on lender. From this, your lender will take an average of your annual income in order to estimate your future earnings. Some may take the lowest annual earnings as your final figure, which may seem unfair, but lenders can be reluctant to estimate your future earnings.
People who are newly self-employed will need a specialist broker to help with their application as finding a lender can be difficult.
Proving your Income when Self-Employed
Most lenders will need two to three years of accounts from consecutive years. Usually you use the SA302 form to provide this which you can access via the HMRC. Your accountant could also prepare your accounts for you if you want to give further documentation and proof of your income.
Proving your Income as the Director of a Limited Company
If you run your own limited company then you need to find a mortgage provider who understands how this kind of income works. Directors have different sources of income and so it is important your accounts are fully looked into and assessed properly to determine your income properly. Your income may incorporate dividends as well as company retained profits. Including all your different income sources will be key to ensuring a correct affordability calculation.
Is it harder to get a Mortgage when Self-Employed?
Self-employed people do feel the hoops they have to jump through can be a little more tricky than the average employed person but with a good income and the accounts to prove it, there’s no reason your dream home can’t be bought.