The idea of getting a mortgage when you are self-employed used to be something of a nightmare. But as more people than ever are now working for themselves, it has become much easier to get a mortgage. Being employed or self-employed isn’t the deciding factor on whether or not to give you a mortgage – but your finances are. Here are some tips on how to get a mortgage when you are self-employed.
No specialist mortgages
First, it is important to understand that there’s no real thing as a ‘self-employed mortgage’ as a specific product that isn’t available for employed people. Instead, it is all about what you earn, your ability to repay the mortgage and still be able to afford all the other basic living expenses like food and utility bills.
Back before 2014, there was something called a self-certification mortgage that allows self-employed people to complete a special form and get a mortgage without proving their income. No surprise but there were lots of problems with them and they were banned in 2014.
Difference between employed and self-employed
While there are no dedicated products just for self-employed people, there are some differences in the application process and requirements when you work for yourself.
If you are employed and have a contracted salary with your employer that is paid through PAYE, then normally a mortgage company will want payslips and a P60. This makes for a simple way to see how much money you have coming in for a lender to make a decision.
When you are self-employed, it can be a little harder to predict and show your income. That’s why being organised and keeping good books is key. The mortgage lender will also want information from HMRC about your tax return. It is worth remembering that almost all mortgages are Self-employed net profit mortgages – this means they use the net profit after expenses as your income, not the gross figure as with employed people.
5 tips on how to get a mortgage
Once you understand the basic difference between employed and self-employed mortgages, you are ready to start thinking about how to get one as a self-employed person. Here are some of the top expert tips to help.
Be clear on self-employed status
There are a few options within the category of self-employed and it is important to be clear on which you are as this can have an impact on getting a mortgage. The main options include:
- Sole trader
- Partner in a company
- Company director
If you are a sole trader, you will have that net profit figure for your income that is used to calculate the mortgage. Contractors are usually worked out on a day rate multiplied by a standard number of working days. Partners and company directors will be decided by how they receive their salary and any dividends.
As Mortgageable point out in this case of company owners “The main thing to remember is that a deposit has the potential to reduce the LTV, so the lower you can make it, the greater chance your application will succeed.”
Prove your income
Being able to prove your income is always harder when you are self-employed because you don’t get payslips. The best way to prove your income is with something called an SA302 – this is a statement produced by HMRC after you submit your tax return each year. This shows your net profit after expenses and is accepted by most mortgage companies.
Check your credit rating
Your credit rating is more likely to be a problem with a mortgage application than your employment status. If you have too much debt, a poor credit rating or financial difficulties in your past, this doesn’t mean you can’t get a mortgage. But the amount you can borrow, or the terms may not be as favourable. Understand your credit rating before you start to foresee problems.
Set a clear budget for yourself
It is a good idea to create a budget for yourself, so you know what you have coming in and going out before approaching a reverse mortgage lender. They will do their own assessment, but it helps you to be realistic in your expectations.
Get the right help
Don’t be afraid to get the right help with the process such as a mortgage broker. They deal with a wide range of products and can find the right one for you taking into account your details.
Options for all
Being self-employed is no longer as big a problem as in the past so, with the right information and preparation, there’s no reason you can’t get the house of your dreams.