It’s suggested that over 40% of people in the UK who’ve been declined a mortgage feel it’s embarrassing, and that somehow they’re a failure. At Crunch Mortgages, we’d suggest that if there’s a “failure” here then it’s likely to do with the advice they’ve been given, rather than simply the actions they’ve taken.
The same industry research shows that people are avoiding pursuing their dream of getting on the property ladder because of outdated myths about what it takes to get approved for a mortgage.
Around 35% assume they’re not eligible or don’t earn enough, and 33% are finding the process and advice confusing and stressful. It’s fair to presume that a huge number of people who could potentially own property are discounting themselves without even trying.
There are around 4.8 million self-employed people in the UK, many of whom mistakenly think their irregular income or lack of three years’ worth of accounts means they automatically don’t meet the requirements for a mortgage. This is incorrect. In spite of research showing that nearly 50% of applications are getting turned down for “non-standard” reasons including self-employment or contracting, our figures for Crunch Mortgages in 2018 show that over 94% of the applications we made on behalf of our clients were accepted.
This article covers:
Please note that we also have a specialist article – How a good mortgage broker can save you money during Coronavirus – which answers questions about the state of the market and whether mortgages are still available in the current pandemic.
What self-employed people can do to improve their mortgage chances
Lenders don’t just look at the numbers when approving a mortgage – there are several other factors that also influence their decision. You’ll stand the best possible chance as a self-employed worker if you follow these tips:
- Speak to a broker first – Not all lenders have the same criteria – a broker will ensure you are matched with the most suitable lender
- Check your credit file – Ensure there aren’t any adverse entries against you, especially ones you’re not aware of
- Ensure you’re on the electoral roll – Check with your local council, this will help with the credit score
- Make sure your accounts are all up to date – To achieve the most competitive rates you need to have an impeccable credit record, so make sure everything is paid on time. It’s good practice to put everything on direct debit
- Stay away from payday loans – Payday loans do not paint a good picture of your finances, and lenders will often read this as you being in financial difficulty. Many lenders will simply decline to lend if there is a recent record of payday loans
- Minimise credit checks for other insurance or credit applications – Multiples credit checks in a short space of time can reduce your overall credit score. Be aware if using comparison sites for insurance they will run multiple checks
- Don’t allow your credit card to reach its limit – The higher the % usage of your credit card will result in a lower credit score. We’d suggest spreading outstanding balances across two cards, rather than having one on the limit
- Don’t make just minimum payments – Again, making just the minimum payments can suggest to the lender that you could be in financial difficulty. It’s also worth considering this because unless you’re on an interest-free card, the minimum payments will never end up paying down the debt
- Sort your deposit early – Preparation is key, especially if family members are gifting you funds towards your deposit
- If using business funds, speak to your accountant – Taking regular withdrawals can lead to a smoother underwriting rather than taking a large lump sum in one go. When taking a large lump sum the lender may ask the accountant to confirm this will not be detrimental to the business, causing an extra delay in the process
- Get your documents in order – See our documents checklist below
- Get yourself an agreement in principle – Most estate agents won’t let you view the property, let alone make an offer without an agreement in principle. This will confirm the maximum loan to give you peace of mind that you are looking at properties within your budget. It’s also a good indication that your credit is in order.
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What documents do I need to apply for a mortgage?
Here’s a definitive list of what mortgage lenders will ask for if you’re self-employed:
- ID – Make sure you have valid photographic ID. If you present your driving licence, make sure it has your current address on it
- Proof of Address – A council tax, utility bill or financial statement will suffice. If everything is online, you should change one of your accounts to postal statements
- Employer – You’ll need to gather three to six months’ payslips and P60s. If you’ve received extra income such as bonuses or commission, some lenders may require two years worth of P60s
- Limited company accounts – If you’re a limited company director then the last two years’ worth of fully signed accounts is required in most cases, though some lenders will accept just one year’s accounts. The latest accounts cannot usually be over 18 months old, so try to finalise the latest year’s as soon as possible
- Personal Tax Returns – Self-employed workers need to request three years SA302s and a tax overview from HMRC – see our Self-Employed Mortgage Guide for advice on how to do this – some lenders will accept as little as one year’s SA302, but three years’ worth will give you access to the full range of lenders and deals
- Contractors – You’ll need the last 12 months of contracts, fully signed by all parties. These need to clearly show your day-rate and have been paid in sterling, with an expiry date ideally included on each contract. Obviously, not all contracts have an end date, some go day-to-day, so rolling contracts can be accepted
- CIS or Umbrella – Six months’ worth of payslips are required
- Bank Statements – These can include postal or downloaded versions of the last three months’ salary fed bank statements, three months business bank statements and three months bank statements showing rental
- Deposit – You need to provide a statement showing funds held, and a build-up of funds. If funds are a gift from a family member, you need a statement letter from them confirming they have funds or that they have been transferred to you
- Background buy-to-lets – If you have buy-to-let properties as a source of income then a Tenancy Agreement and three months bank statements to evidence rent will be needed
- Life insurance or other protection – Lenders will usually need to see evidence of any Life insurance you have in place to cover the mortgage. This usually means they just need to see a copy of the policy summary.
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Advice for first-time buyers
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.
Alongside the following 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.
If you operate as a sole trader, as well as all the other paperwork, you’ll need to ensure you have a minimum of one year’s finalised accounts or an SA302 from HMRC that is dated less than 18 months old.
Contractors and freelancers
If you’re a contractor or freelancer working through a limited company, you’ll need your current contract and, in some cases, the past 12 months. If this is not possible we can revert to using your personal tax returns or company accounts.
If you’re a limited company director, you’ll need to provide your latest year’s company accounts or personal tax return as a minimum. Some lenders will require two or three years’ accounts but there are still plenty of options with only one year’s accounts.
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Earnings and affordability
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’. Our mortgage calculator will give you an idea of how much you can borrow, but to get a personalised calculation it’s always best to speak to one of our expert advisors. Lenders will look at all sorts when deciding whether or not to give you a loan, including lifestyle spending, commitments, and dependants.
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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. Many 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. However, we have access to the full range of lenders so if you only have one year’s accounts or have seen a big increase in the latest years we have a lender to help.
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Crunch Mortgages can help
As self-employed couple Steve and Karen discovered, the secret to getting a mortgage is simply to speak to a broker who specialises in mortgages for the self-employed and contractors – this is exactly what we do!
At Crunch Mortgages we understand contractors and the self-employed better than anyone and we make sure that if you’re eligible for a mortgage, then we’ll find the best one for you – and if you’re not ready yet, then we’ll help you get there.
Failure is not an option as far as we’re concerned! Give us a call today and find out what you can actually achieve.
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Self-employed mortgages webinar and Q&A
Following our recent business expenses webinar, many of you wanted to see a session on getting mortgages based on your self-employed income. Check out our-self employed mortgages webinar video below!
We’ve also compiled a selection of the questions asked during the event, along with the responses from Jamie Challis, Senior Mortgage Consultant at Crunch Mortgages.
Please note: This Q&A is for informational purposes only and should not be construed as advice.
Q: For the last 7 years, I have worked contracts of 1-2 years, separated by periods of backpacking for 6-9 months. Am I going to struggle to get a mortgage? Do I need to stay put in the UK for a while?
A: Ideally you’d want a minimum of 12-months continuous contracting immediately before the mortgage application.
Q: How will rates for a sole trader getting a mortgage generally compare with rates for ’employed’ people?
A: Lenders offer the same rates to employed and self-employed people.
Q: I incorporated this financial year and I am the sole company director. I also have income from a buy-to-let. The buy-to-let isn’t owned by my company. What will I need to remortgage, proof of income wise?
A: Your proof of income can be as little as your latest year’s accounts or SA302. An income of £25,000 or more is generally the minimum that lenders expect to see, but some have no minimum income requirement. We’d suggest contacting us to discuss in more detail.
Q: I’ve gone from employed to self-employed since I took out my current mortgage, which is up for remortgage soon. I’m earning more as a contractor but can I expect a large interest rate increase because of the employment status change? Is it preferable to stay with the same lender or search the market again?
A: It’s definitely worth reviewing all mortgage options. We can attain mortgages for contractors with relatively short contracting history. Rates are very competitive at present, and you certainly won’t be penalised for being a contractor. Typically, if you’ve been contracting for at least 12 months, there are quite a few lenders that can assist.
In certain circumstances, we can find options for clients who have been contracting for less than this if they have experience in their industry.
Q: If you take out a mortgage in the UK, can you take contracts abroad (possibly for 3+ years) without issue?
A: There are lenders that may consider this, however the income would need to be in sterling.
Q: I’m a director of a limited company. I have 50%, my husband has 50%. He has over 10 years’ experience in our industry, I only have experience in our industry since I have started working within our business (six months). Would this make it difficult for us to get a mortgage together as I have no experience outside the company?
A: Yes, this makes things a little more difficult, as six month’s self-employed is too short a period for lenders to accept any of the income. However, if this is a contract worker situation, and if the application were in joint names, it might be possible to secure a mortgage.
Q: My limited company shares are split 50-50 between my wife and I. Is it worth exploring a joint mortgage as the potential take home is greater (double), rather than just assessing my earning capability?
A: Yes, it would be advisable to apply in joint names to use all of the income. Many lenders require married couples to apply in joint names.
Q: My wife is not working (taking care of baby). I included her in my limited company – she has 50% share so she can take dividends, so we have less tax on dividends overall. How this will affect my search for a mortgage?
A: As long you apply in joint names, this won’t affect your maximum borrowing based on using 100% of the salary and dividends drawn, as reflected on your company accounts or personal tax returns.
Q: When a mortgage provider asks for my income – as a freelancer with a limited company – do I input the amount my company took in for the year?
A: As a limited company, most lenders will use your salary and dividends to calculate your income. Some lenders can use different figures, such as share of profit plus salary. If you’re a contract worker, they can use your day rate contract to calculate your income – this would normally give you higher borrowing potential.
Q: Since I’ve had my limited company I’ve predominately had one major client each year. Is that more frowned upon rather than having multiple clients?
A: The number of clients you have had is irrelevant when using your accounts figures as income verification. This is not something that lenders ask, or can determine from your profit figures.
Q: I realise it’s difficult to say as it depends on the lender but any idea on the % of deposit? Is it generally higher than 10%? Would a higher % make it easier? Thanks.
A: The minimum deposit that you would require would be 5% for a purchase. Having a bigger deposit will give us more lenders to choose from and the interest rates will improve with each 5% increase in deposit.
Q: I have been told by my mortgage advisor that I would not be able to move house and get another mortgage due to having less than two years worth of books – is this true?
A: The minimum is one years finalised company accounts or personal tax return to obtain a mortgage.
Q: I’m now coming to the end of a discount period. When I first took out my mortgage I was in a permanent role, but I’m now a freelancer. If I stay with the same lender, will I need to go through an affordability check on my self-employed income to get a new deal?
A: If you are just changing rate with no other changes, we can simply switch your rate without underwriting.
Q: I don’t have an accountant and currently do my own accounts. Will this affect my ability to get a mortgage?
A: Providing you have completed a Self Assessment, you’ll need to provide SA302s and tax overviews as evidence of your income. For contractors, we can generally use current contracts to validate income.
Q: I’m currently doing freelance work at evenings and weekends, alongside my full-time job. Will lenders take both my full-time and freelance income into account?
A: The lender will be looking for sustainability, so the hours need to add up and it needs to be clear that you haven’t simply taken on the extra work to get the mortgage. At least a year’s Self Assessment will be required to prove income.
Q: For various reasons, my income this tax year hasn’t been great. However, I’ve earned a lot more in the past few years. Will lenders just look at previous Self Assessments, or will they want to know how I’m doing in the current tax year?
A: If income has dropped then they will use the last available year’s accounts or tax returns. These generally have to be within 18 months.
Q: I’m about to start contracting in the industry I’ve worked in for over 15 years. I’m also looking to move home. Will I be able to get a mortgage?
A: Yes, providing the new contract will have a value of £75,000 per year, £500 per day or an IT-based role.
Q: I have a full-time job and I work as a Hermes driver on the side. Can I use my Hermes income to help me get a mortgage?
A: Yes but you will need to have at least a year’s personal tax return.
Q: What is the minimum income that I need to get a mortgage?
A: There is no minimum income, however, lenders will use an affordability model so on lower incomes under £10k we often find the majority of available income is used up to cover standard living costs. Therefore the available loan will be very low.
Q: I’m in negative equity. Can I switch my mortgage provider to get a better rate?
A: Unfortunately, it won’t be possible to switch providers while in negative equity. However, many lenders will still be able to offer rate switches to existing customers. We’d suggest contacting your existing lender to see what they can offer to you. It would also be worth getting an up-to-date valuation for your property, as its value will be dependent on how much similar properties have been selling for recently.
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Need more advice?
Our team of experts can help. Head over to Crunch Mortgages for more information.