Tips for getting a mortgage if you are self employed

Written by Daily Fix - Published 19-Aug-2022, last updated 02-Jul-2024

For many people, being self-employed is a great way of life and the ultimate way to earn a living. Indeed, self-employment can be a great way to earn a living, but it can also have it's problems.

One such problem, that many self-employed people will face at some point in their time working for themselves, is that it can be a obstacle to getting a mortgage. Lenders like to see a steady income and employment history, both of which can be more difficult for the self-employed to provide than for employed people with a salary.

Convincing a lender to lend to you and give you a mortgage when you are employed involves showing them payslips to prove you have regular income and drawing up a budget to show your outgoings.

But getting a mortgage when you're self-employed can be a little tricker, but that doesn't mean that you give up on buying your own home whether you are a first time buyer, or you're moving up the property ladder.

When self-employed people apply for a mortgage, lenders typically want to see two years of accounts in order to verify your income. If you're only recently self-employed, providing these accounts just isn't possible.

Affordability can be calculated in different ways depending on how you have structured your self-employment and/or businesss - you are trying to show the lender that you will have no problem in making the payments on your house

Here are some top tips for getting a mortgage if you're self-employed:

Get organised

Whether you act as your own bookkeeper or you retain the services of a qualified accountant, you will need to file tax returns. If you are self-employed through a Limited Company then you will file personal tax returns for yourself and annual accounts for the business.

If you are self-employed outside if a Limited Company you may only be filing personal tax returns. You may also have payslips showing your taxable income, P60s and an SA302 (an official tax calculation from HMRC that can be used to prove your income once you've submitted your Self Assessment).

Whichever way your self-employment is structured, the lender will want to see a couple of years of accounts or tax returns, as well as payslips and P60s so that they can see a history of your income.

Have all of these documents to hand so that when the lender requests them you can supply them straight away. The last thing you want is to have to ask your Accountant for copies which could slow down the mortgage application process.

Use an online mortgage calculator to work out how much you can afford to borrow and to give you an accurate idea of exactly how much you are committed to spending each month on things like council tax, utilities and food.

Even if you don't intend on using a mortgage calculator It will be useful to have details of monthly repayments you have to service such as a car loan, utility bills, and child maintenance payments as this will be information the mortgage lender will want from you to assess the affordability of the mortgage.

Improve your credit score

One of the things mortgage lenders will look at when assessing your mortgage application is your credit score. There are a few credit reference agencies operating in the UK and they will have their own way of calculating your credit score.

Some credit reference agencies allow you to sign up for a free account which allows you to monitor your credit score.

ClearScore gives you a score out of 1000 and tells you if your score is stable, rising or falling. Experian scores you out of 999 and Credit Karma has a maximum score of 710.

If you are planning on applying for a mortgage then it's a good idea to start monitoring your credit score a few months before starting the mortgage application process so that you can see if there are any factors harming your score and take action to improve your overall credit rating.

How to improve your credit score

If you're looking to improve your credit score, there are a few things you can do increase the rating.

First, make sure you're paying all of your bills on time. This includes any credit card bills, loans, or other payments you may have. Missed payments can seriously decrease your credit score.

Try to keep your credit card balances low - don't max out your credit cards. But that doesn't mean you need to stop using your credit cards completely or cancel the cards. Lenders can look favourably on people wo regularly use credit card and pay off the balance in full at the end of the month. It can show responsible and reliable use of credit.

Don't open new accounts in the run up to applying for a mortgage as lots of credit card applications or loan applications can mean you are exposed to a large amount of available credit which mortgage lenders may not like.

Make sure you are on the electoral register.

Check your credit report to make sure you recognise all of the accounts on the report. Identity theft is a huge problem and so you want to make sure no-one has opened an account in your name. If there is anything on the credit report you don't recognise or there's an entry that worries you, query this with the agency.

Find the right lender if you are self employed

Some lenders specilise in mortgages for self-employed people. Specialist self employed mortgage companies understand that the self-employed often have a more complicated financial situation and may not have traditional employment income. They will often look at other factors such as assets, savings, and credit history when considering a loan application.

If you are self-employed and thinking about buying a home, reach out to a lender who specialises in mortgages for sole traders, company directors and partnerships, limited company contractors and umbrella company workers to compare your options and chances of being offered a mortgage. Specialist lenders may look at different criteria than regular mortgage lenders.

Consider going to a mortgage broker who can help steer you through the mortgage pitfalls, find the right lender for your circumstances and improve your mortgage chances. For instance, they may know lenders that will take into account the net profits of a Limited Company when assessing your mortgage application. If you are the Director and 100% shareholder of a Limited Company then these net profits effectively belong to you, it's just that you chose not to extract them from the Company.

Self-employment doesn't have to be a hinderance when getting a mortgage

As we have seen, self-employed people may need to jump through a few more hoops when applying for a mortgage compared with their traditional employed counterparts.

Mortgages are a huge part of home ownership and most people cannot get their foot on the property ladder without a mortgage. But for the recently self-employed, they can be difficult to obtain.

There are a few things that the self-employed can do to make themselves more attractive to potential lenders, and increase their chances of getting approved for a mortgage, so make sure you have your documentation in place, you've checked your credit score and you have a good history of credit repayments to give you the best chance of being offered a mortgage.

If you are planning on putting down a larger deposit, this will reduce your loan to value ratio which not only could help your mortgage application but may also mean you are able to get a better interest rate.