If you’re self employed, it’s no secret that getting a mortgage becomes a little more difficult than if you’re employed. At the end of the day, lenders want to ensure that you’re risk free and one of the uncertainties which comes with self employment, in many instances, is that lack of a guaranteed income. Especially if you’re running a small business as a sole trader, you can initially be seen a little more of a risk than someone who is employed and is guaranteed a pay cheque in the bank at the end of the month.
Before the ‘credit crunch’ back in 2007, those who were self employed were able to ‘self-certify’ and it was simply a case of telling the bank or lender how much they earned rather than proving income via bank statements. In many cases, applications were approved very quickly with few checks. Unfortunately, times have changed, despite the fact that self-cert mortgages were only ever intended for freelancers, contractors and business owners, as you would expect, the system became abused and many were greatly exaggerating their income to secure a bigger mortgage, seeing them dubbed as ‘liar mortgages.’
In short, self-cert mortgages are now banned and those who are self employed have to go down the same route as anyone else to secure a mortgage, albeit without a fixed regular income in many instanced.
As with all borrowers, however, it’s all about portraying yourself to lenders in the best light and showcasing that you’re not a risk and, as such, below you’ll find our top tips for getting a mortgage if you’re self employed.
Providing Evidence Of Your Income
The first tip for securing a mortgage is to know what you’ll be asked to provide. Many business owners, contractors and freelancers aren’t aware of exactly what they’ll need to secure a mortgage and, as such, aren’t prepared. The bottom line is that you need to prove your income and, as such, you’ll be generally expected to provide at least 2 years worth of accounts, sometimes 3. It’s important to understand that many lenders will expect accounts to be prepared by an accountant, often a chartered one. The key thing here is to make sure your accounts are up to date – lenders hate out of date accounts.
If you don’t have two years worth of accounts, it doesn’t always mean you’ll be refused a mortgage. Some lenders will accept one years worth if you’ve shown a great profit and regular work and it’s worth speaking with a specialist mortgage advisor who will be able to advise accordingly.
If you’re already a homeowner and are looking to remortgage, your lender may help! If you’ve got a strong track record of repayments and can showcase affordability, you may well find you’ll be approved. Again, always be sure to seek advice from a specialist advisor first.
Things which can help when it comes to proving affordability is to have a larger deposit and, just as is the case with any lender, the larger the deposit the better your chances of securing a mortgage. On the other hand, if you’re already a homeowner, having a decent amount of equity in your property can help.
Lastly, having a fantastic credit score and history is something else which is expected and which can help considerably. A poor credit history and self employment don’t go well together, unfortunately. If you’re wanting to know how to improve your credit score, the Totally Money guide here is a great read.
Consider Your Business Structure
A business will generally either be run as a sole trader, a partnership or as a private limited company and your structure can impact upon the approach taken to secure a mortgage.
A sole trader is a one man band and the businesses money is his money, they’re one and the same entity. A lender will look simply at the profits from the business (revenue minus expenses) however may request to see a SA302 form which shows how much tax you’ve paid and, as such, how much you’ve earned.
The difference with a partnership is that there’ll be two or more people involved, all of whom are eligible for a share of the profits. In this instance, it’s important to have correct accounts to show how much each partner has taken out and therefore see your annual income.
A limited company, on the other hand, is an entity in it’s own right and keeps your business and personal finances separate. Most directors will pay themselves a minimal salary and take the rest as dividends for taxation purposes. As such, if you’re running a limited company it’s important that lenders are taking into account both salary and dividends when assessing your income.
The Route To Take
At the end of the day, securing a mortgage if you’re self employed isn’t impossible and is, in theory, the same route as anyone else would need to take. The only difference is that it’s often harder for someone who is self employed to prove their income. So long as you have an up to date set of accounts, a great credit history and a sizeable deposit, there’s no reason why you’ll be seen as any less attractive than someone who is employed and by shopping around and finding the best lender based upon your individual circumstances, you’ll be able to find one who is prepared to work with you on your application.
Our top tip above all else is to take the time to speak with a mortgage broker who will be able to undertake much of the hard work for you and help you secure a mortgage and get one step closer to owning your dream home!
At Search Mortgage Solutions, we’re proud to offer specialist mortgage brokers in Manchester, Birmingham, Leeds, Liverpool, London and Bristol and encourage you to get in touch on 0800 756 7794 to discuss your needs and requirements as a self employed business owner looking to secure a mortgage.