Can I get a mortgage if I’m self employed?
Michael Foote is director of Quote Goat
Research conducted by Aldermore Bank shows that around a third of self-employed people believe that mortgage lenders are biased against them on the basis of their employment status.
With approximately 4.8 million self-employed people currently living in the UK, it is therefore probable that many are discounting themselves from owning a property without even trying.
Despite this commonly-held belief, there is in fact nothing to suggest that being self employed limits the amount of mortgage deals that are available to you.
However, people who work for themselves are likely to have more complex incomes than those who are employed by a business, and must often be able to prove their earnings before lenders are willing to take a risk on them.
Here’s a breakdown of what you can do to improve your chances of getting a mortgage approved if you are self employed.
Prove your income
Generally speaking, the longer you have been self employed for, the higher the probability of you getting a mortgage is.
If you have been self employed for more than three years, you shouldn’t expect too much resistance from most lenders, as long as your accounts have been well maintained.
In most cases, lenders will insist that your accounts are prepared by a chartered or certified accountant, and will want to see the income you have reported to HMRC, as well as tax paid.
Some lenders may be willing to consider evidence of income from two years’ worth of accounts. If you find yourself in this position, you should aim to gather as much proof as possible to support your application.
If you have only been self employed for one year or less, it is unlikely that the majority of lenders will be confident enough to determine that you will be able to maintain your income.
There are exceptions, however, and a small number of lenders may consider applications of this nature under specific circumstances, such as if you have a history in the same business before you switched to contracting.
Use a mortgage broker
Employing the services of a mortgage broker can help improve the likelihood of having your mortgage approved if you are self employed.
As the means by which income and eligibility are calculated vary considerably, the advice of an independent broker could provide critical.
This is because they can point you in the direction of lenders who are not only willing to lend to you, but also those who are most likely to offer the most favourable deal.
Usually, mortgage brokers will charge a flat fee of around £500 or up to one per cent of the mortgage amount – though the benefits of having one on your side can often more than outweigh this expense.
Avoid the red flags
All mortgage applicants should be prepared for their outgoings to be scrutinised by potential lenders – and self employed applicants are no exception to this.
For at least six months before you make an application, it is a good idea to hold back spending on luxury items and to avoid falling foul of what lenders would call ‘red flags’, such as online gambling or payday loans.
Other red flags that you should steer clear of include late or missed credit card payments, excessive use of your overdraft, and a lack of regular savings.
Avoiding red flags will help to improve your Loan-to-Value [LTV] ratio, which is the number lenders use to determine how much risk they are taking on with a secured loan.
Put simply, the lower your LTV is, the more competitive the rates that are available to you will be.
Another way to improve your LTV is by increasing the amount of money that you have saved up for your deposit.
The more that you are able to save, the less you will have to borrow – and ultimately repay – with your mortgage.
It is clear that getting on the property ladder is not as unattainable as some self-employed people may have been led to believe.
Despite this, it is true that self-employed applicants must often have to provide more proof of their income than employed workers, so it is crucial that you are well prepared to be scrutinised by lenders if you fall under this category and are looking to get a mortgage.
So what’s stopping you? If you work for yourself and have been dreaming of buying your own home, you could find yourself moving in before you even know it.