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Self-employed mortgages: advice for first-time buyers

As a self-employed professional, chances are you enjoy many perks: choosing your own working schedule, being your own boss, earning more and, hopefully, feeling happier. Without pros there wouldn’t be cons, and one of the biggest cons facing self-employed people today is getting a self-employed mortgage.


With rental prices continuing to shoot skywards – Brighton and Bristol saw an average rise of 18% in 2015 – many first-time buyers are desperate to get on the property ladder.


The good news is that being self-employed shouldn’t prevent you from getting the mortgage you need. It’s just a case of knowing where to look and getting everything in place.


What you’ll need


Get off to a good start by ensuring you have your finances in order, starting with the deposit. The vast majority of lenders will ask for 5% of the total home price up-front. For example, if your dream pile cost £500,000 lenders will be asking for a deposit of £25,000. This would mean you’ll be taking out a mortgage in the region of £475,000 plus interest.


Make sure you can easily access your full address history, have a proof of identity (driver’s license or passport) close to hand and, perhaps most crucially, a cluster of bank statements to prove your income. Alongside these mortgage essentials, sole-traders and limited company contractors or freelancers will need additional information to help prove to lenders that they are a reliable investment.


Sole trader mortgages


If you operate as a sole trader, the paperwork you’ll need to ensure you have ready includes a minimum of one year’s finalised accounts, or an SA302 from HMRC that is dated less than 18 months old.


Mortgages for limited company contractors and freelancers


If you’re a limited company contractor or freelancer, you’ll need to prove a minimum of 12 months’ contracting or freelancing experience and have at least six months remaining on your current working contract. However, many lenders will need more insight than this, usually in the form of past accounts.




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What to expect


Talking to a reputable mortgage broker can help iron out any questions or queries. They’re going to want to know exactly what your financial status is, so be prepared with information such as the income (if any) that you receive through other means and what assets you have in your name.


Remember you may have good and bad months of business, but your mortgage needs to be paid without fail – what will happen if you go out of business?


Lenders look a lot more favourably if you have more than two years of accounts behind you. If you provide less than this, your options will be limited. Those with less than 12 months of accounts will find it particularly tricky to find a lender willing to accept them. Biding your time is key when applying for a mortgage as a freelancer.


When you’re shopping and expecting to spend a lot of money, you’ll probably visit a few shops and browse online trying to find the best deal. Getting a mortgage is exactly the same. There are many high street lenders touting for mortgage business, including banks and building societies.


However, many of these aren’t the best option for small business owners because of a lack of understanding about company finances. Many high street lenders are geared toward PAYE finances and finding a specialist small business mortgage broker can be time-consuming.


Earnings and affordability


Cash


A big question on sole traders’ and freelancers’ lips when applying for a mortgage is ‘how do lenders calculate my earnings?’ The most common way a lender will analyse earnings is by looking at the net profit of your business – whether you’re a sole trader or freelancer. If you’re set up as a limited company, a lender will look at your salary and dividends, or share of net profit. For contactors, your annualised day rate will be taken into consideration.


The amount you can borrow is often determined by an ‘affordability calculator’. There are plenty of online calculators that will give you an idea of how much you can borrow, but they’re never precise. Lenders will look at all sorts when deciding whether or not to give you a loan, including lifestyle spending, commitments, and dependants.


Common problems with self-employed mortgages


The most common problem for a self-employed person applying for a mortgage is only having one year of accounts. Most lenders require two or three years. A big increase in your income can also prove problematic. Lenders will often average out the last two or three years.


As unfair as it may seem, lenders often don’t view self-employed people as having a steady income. Think about how you can counteract this. Keeping your finances in impeccable order over your years as a self-employed person or small business owner could put you on better footing when it comes down to a mortgage application.


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