Is it harder to get a mortgage if you are Self-Employed?
Whilst there is that perception that it’s more difficult to buy a home or property if you’re Self-Employed and historically there was some truth to it, in the last five years, lenders have become increasingly more understanding of the different ways in which people earn money today.
Currently, it’s no more difficult to get a mortgage if you’re Self-Employed than if you’re employed, there are just different questions and requirements to fulfil.
If I only have one year’s accounts, can I still get a mortgage?
Yes it’s possible. In the past you needed at least three years worth of accounts, but many more Mortgage Lenders are understanding of those who have only been Self-Employed for a year. It might reduce the number of lender options that you have, but it’s certainly possible to obtain a mortgage if those are your circumstances.
Are self certified mortgages still available?
In the early 2000s you could declare the income that you earned yourself without the need for proof, but that became an issue in the 2008 financial crisis, where banks around the world realised that they had been lending too much to people without adequately ensuring that they could afford it.
It’s therefore unlikely that people being able to borrow money without proving their income will never happen again.
What sort of documents do Self-Employed Mortgage applicants need?
Self-Employed can be a problematic term in that it covers a number of different employment types.
You are considered Self-Employed as a Sole Trader, if you’ve created your own limited company alone or in a partnership with someone else or as a contract worker. This means that the documents required can vary a little bit, depending on what type of Self-Employed worker you are.
Tax returns are often used, but for the limited company directors, trading accounts for the company can be used as well.
What is the difference between someone who is Self-Employed and a limited company director?
A Self-Employed person will be considered based on profits that they have individually declared on their tax return.
Whereas a limited company director, you’re Self-Employed and control your own business, but you’re actually an employee of your own company. So personal income is usually taken from the company by way of smaller salary and dividends.
It’s often perceived that because they take that small salary, lender’s will only lend a small mortgage loan. Some lenders, however, will lend on a combination of the salary and the dividend and some lenders will be willing to consider some limited company profits as well.
Limited company directors can therefore find it easier than other Self-Employed applicants as there can be two or three ways in which a lender could look at their income.
Can you get a joint mortgage if one applicant is Self-Employed?
This is actually quite a common instance and the applicant will just be processed as Self-Employed for one applicant and employed for the other. Lenders are quite receptive to this and it doesn’t usually cause any problems.
Are Buy to Let mortgages available for the Self-Employed?
Lenders really don’t discriminate between employed or Self-Employed people whatsoever. Self-Employed people can often be the most entrepreneurial and therefore more likely to invest in property.
How much can a Self-Employed person borrow?
Regardless of how an applicant earns their money, it’s the quantity that changes how much they can borrow. Those with a larger income will be able to borrow a higher multiple of their annual income, based on the lender’s criteria.
In the last year, lenders perhaps were slightly more cautious with how much they lent to people in certain lines of work, but outside of the pandemic, once a lender has assessed affordability, the amount they’ll lend is based on that income, regardless of how it is earnt.
How do you prove your income then as a Self-Employed person?
Proving income for Self-Employed people is going to require either tax returns or trading accounts or maybe both. Quite often, it helps Mortgage Brokers speak to the client’s accountant on their behalf, which can make it much easier to get the documents needed. Any good Mortgage Adviser will be adept at knowing what’s needed and asking the accountant to provide it.
How does remortgaging work for the Self-Employed?
If remortgaging from one lender to another, it will be a case of proving the same proof of income documents as when the initial mortgage was taken out. If the client remortgaging is staying with the same lender, then actually whether you’re Self-Employed or employed doesn’t really change any aspect of the remortgage process.
As long as you’ve been paying the repayments on your mortgage, staying with the same lender, doesn’t affect any part of the process.
How can Purely Financial Planning Help?
If you are Self-Employed, don’t assume that you could never get a mortgage. Equally, if you happen to be one of those lucky Self-Employed people that’s been very successful over the years, don’t assume, therefore, that things are easy for you.
To get in touch for further advice, just call or navigate to our contact page. We are always delighted to hear from people with their mortgage queries and there is no obligation to use our service.