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If you’re self employed, you may think the nature of your income means getting a mortgage is near impossible, but we’re here to tell you the opposite.
A study done by The Office for National Statistics showed self employment passed the 5 million mark in the UK at the start of 2020. Which means, more people than ever are likely to be self employed and looking to secure a mortgage – whether it’s their first home or a remortgage.
There are a lot of questions and grey areas surrounding self employed mortgages and we want to tackle frequently asked questions around this topic so you can head into your mortgage journey equipped with all the right knowledge.
Can you get a mortgage if you only have a one year’s worth of accounts?
Most mortgage lenders like to see two or more year’s worth of accounts, but if you are new to self employment, you may only have one year to show a lender.
You can still secure a mortgage with only one year’s worth of accounts, but it very much depends on your business. If you have been in a line of work for a long time and have made the transition into working for yourself, you are likely to be viewed differently in the eyes of the lender compared to somebody who has started an entrepreneurial adventure in an industry they have little experience in.
Some lenders may also ask for an accountants reference or a projection of earnings for the next year to support the accounts you provide.
Buy to let mortgages for self employed people
If you are self employed and looking to secure a buy to let mortgage, a lender will look at your case from more of an investment perspective. They will look at the property, it’s investment potential and whether the rental value will cover the mortgage payments, rather than looking into your self employed income.
What documents do you need to prepare for your mortgage application?
One thing that’s often overlooked is creating a good relationship between your accountant and the mortgage broker – this is something that will hopefully make your mortgage process a lot smoother the entire way through, particularly when it comes to obtaining all the documents you need.
The type of documentation you will need during your mortgage application will vary depending on your self employment status, for example whether you’re a sole trader or a limited company. However, in most cases you’re going to need your tax calculations which come with a tax overview and you will also need your business accounts spanning at least two years (however, under two years worth can also be considered). Sometimes you will also need an accountants reference, which is where having a good relationship established between your broker and accountant will come in handy.
Self employed vs limited company director
If you are a limited company and your shareholdings are more than 10%, then a lender may look at you in the same way as a self employed individual whereby a lender will look at the salary you take as well as any dividends to assess your affordability. Some lenders may also consider the retained profit that you leave within the business as well.
Are self certified mortgages still available?
Post 2008, the emphasis on responsible lending has been heightened and therefore, self certified mortgages are no longer available. There are various legislation and legal processes that have come in place to ensure responsible lending is guaranteed – which is why the level of documentation you now need to provide has stepped up in recent years.
The great thing about being self employed is that you can control the process from the outset. So for example, if you approach your broker early with a property type in mind that you’d like to buy, you and your broker can work out how much turnover, profit, salary and dividends you need to be working towards in order to increase your chances of mortgage success. An employed individual does not have this luxury of being able to tailor their income to suit their mortgage application – besides promotions and pay rises which aren’t always guaranteed.
Can you apply for a mortgage if one of you in a partnership is self employed?
If you are looking to buy a house with someone, where one of you is self employed and the other person is employed through a company, this shouldn’t impact your application hugely. In any mortgage application, your income will be looked at on an individual basis as well as collectively, regardless of your employment status.
You may be questioned on your affordability if you have only been self employed for less than a year, in which case a lender may only look at the income of the employed individual to determine your affordability – this will naturally be lower than if they looked at a combined income of two people.
What other aspects can impact your mortgage application?
As is the case with any mortgage application, no matter what your employment status is, your credit rating will play a part in your affordability assessment. It’s a good idea to obtain your credit report before your mortgage application, so you can discuss your options with a mortgage broker and discover the best way of obtaining a mortgage if you do have adverse credit.