Getting a mortgage when self-employed
Getting a mortgage when self-employed is more a bit difficult than getting a mortgage when you are an employee.
However, it is not impossible to get a mortgage when self-employed. In fact, the same mortgage rates and mortgage products are available to those who are self-employed. The only thing that differs is that a self-employed person will need to show more as evidence of financials and accounts than those who are not self-employed. The mortgage rates for self-employed people tend to be the same for those who are traditionally employed, however financials, credit rating and the evidence provided may have an effect on the rates.
You can check what the mortgage rates are for any mortgage with our free mortgage comparison tool. Since the mortgage rates are about the same for a self-employed person, you can search the market quickly to get an idea of what types of rates you are looking at getting.
Self-employed mortgages are not a thing
Many people who are self-employed and looking for a mortgage do not understand the fact that mortgage lenders offer the same mortgage products and mortgage deals to borrowers who are self-employed. Whilst there used to be self-cert mortgages, where prospective buyers simply told a lender how much they make without having to provide proof, those have been done away with nowadays. Even though self-cert mortgages are no longer, those who are self-employed still have a chance at getting a mortgage. Self-employed earners simply must provide more documents as evidence of income than most others.
Having your finances organised, working with a qualified accountant and having business accounts which show profit from the last few years are all ways to make getting a mortgage easier when self-employed. It also may be worth your while to speak with a mortgage adviser knowledgable on mortgages for the self-employed to help the entire process run more smoothly.
What qualifies as self-employed when getting a mortgage?
Those who are sole-traders, a contractor, in a partnership or who are limited company directors are all considered self-employed. The type of self-employment income you have dictates what types of financials you will have to show.
Sole-traders
The HMRC considers anyone who is a sole trader and has earned more than £1000 within one tax year from their business as self-employed. As a sole trader, your business and personal accounts do not need to be separate. However, tax forms must be submitted to the HMRC to meet the required criteria. Income for sole traders also includes any earnings from income or property, such as that from a buy-to-let property.
Partnerships
You are considered self-employed if you have a 25% share or more in a business. Like with sole traders, members of partnerships will need to show their personal income. However, they may need to show some business accounts as well to show where the income is coming from.
Contractors
Contractors are treated much the same as sole traders in that lenders will want to look at their personal income in the form of personal accounts and a self-assessment tax return.
Limited company directors
If you are the owner of a limited company or own more than 25% of an LLP from which you are paid salary and dividends, then you are considered self-employed. Most lenders will want to see at least three years of statements for both business and personal accounts. Your dividends do not typically get viewed as income by lenders.
How many years of accounts do I need to get a mortgage when self-employed?
Mortgage lenders vary on this. Most self-employed people must show at least three years of accounts relating to their business. However, there are some lenders who accept either only one or two years of accounts under the conditions that the business shows a healthy profit.
Those with less than three years of accounts to show will have to show a few extra things in order to be approved for a mortgage. These applicants will have to show proof of prior employment, a lower loan-to-value ratio, at least months of the most recent personal and bank statements, and a past 12 months of net income.
What credit score do I need for a mortgage when self-employed?
While there is no exact number as to what credit score you need, mortgage lenders are more likely to lend to borrowers with a score in the ‘good’ or excellent range. Credit ratings do differ across the three credit bureaus, so it is good to know what the ratings are and know where you stand.
For Experian, scores between 881 and 960 are considered to be good. Scores ranging from 961-999 are considered excellent. With Equifax, 465 is a good credit rating and a score of 466-700 puts you in the ‘excellent’ category. Finally, for TransUnion, a credit score of 604-627 is good and a score of 628-710 is excellent.
The best deals are reserved for those with an excellent rating, however there are still favourable deals available to those with a good rating. While mortgages may be offered to those with a fair rating, it may be more difficult to get a mortgage, and the interest rates will be much higher. Those with a poor rating are rarely offered a mortgage deal.
Dashly users are offered a free credit report from Experian. By registering with Dashly and verifying your identity, you can see your credit accounts as well as any negative or positive factors.
What evidence of income do lenders want to see for self-employed persons who want a mortgage?
SA302 HMRC Tax
The SA302 is the tax calculation from your self-assessment tax return. It shows how much personal income you declared during a particular tax year (6 April to 5 April). It relates to your personal tax return, not a limited company tax return. It can be generated in two different ways:
Accountant version — your accountant may be able to provide a SA302 via their tax software if your accounts are filed by them.
HMRC filing version — if you or your accountant file the self assessment using HMRC online, then you can log in to your HMRC online account and print it yourself.
Who can use the SA302 as income verification for a self-employed mortgage?
The SA302 is used for sole traders to report their income. Since the income for sole traders does not need to be separated between personal and business accounts, the SA302 counts as eligible proof of income when submitted with other necessary forms, such as the Tax year overview. The business year is generally the same as the tax year so there are no significant timing differences, particularly if the self assessment return is submitted immediately after the tax year ends. If you are not a sole trader, but are in a partnership or are a limited company director, you will not be able to use the SA302, and instead will need to show proof of income in another way, such as with certified accounts.
Tax year overview
The Tax year overview is a newer requirement that is used alongside the SA302. It is used to prove income claimed on the SA302 and shows any payments made. The Tax year overview is then cross referenced with your SA302. You can obtain this by logging into your HRMC account online.
Accounts
Most lenders will want to see at least three full years of accounts that serve as evidence of your income. Generally, the more years of accounts you can provide, the better your chances are of getting a mortgage. Self-employed borrowers must have proof of business accounts showing that the business has been profitable in at the very least, the last 12 months.
Some lenders will accept only one or two years of accounts. For these accounts, applicants should have:
Proof of 12 months’ of prior employment within the industry your business is in before you started your self-employment.
Maximum 85% LTV. Loan-to-value is the amount of your mortgage in relation to what the property costs to buy. The lower this is, the more likely lenders are to approve your mortgage application
Most recent three months’ personal and business bank statements. Sometime sole traders do not use a separate business account, so personal account statements along with a SA302 are acceptable.
Past year of net income.
Accountant’s certificate
Most lenders require an accountant certificate from a chartered accountant to certify income. This means only qualified accountants can complete this form. You must make sure your accountant is certified with a qualified body, or your mortgage application may be declined.
The qualified bodies from which accountants are eligible are:
Institute of Chartered Accountants (England or Wales) FCA/ACA.
Institute of Chartered Accountants (Scotland) ICAS.
Institute of Chartered Accountants (Northern Ireland) ICAI
(All chartered accountants may just sign as CA)
Chartered Association of Certified Accountants
ACCA/FCCA.
Chartered Institute of Management Accountants CIMA/ACMA/FCMA.
Association of Authorised Public Accountants AAPA/FAPA.
Association of Accounting Technicians MAAT/AAT.
Association of Certified Professional Accountants ACPA/FCPA
Mandatory self-employed submission form
Some lenders may require this to be completed to prove your business has not been affected by COVID-19. Even if your business has not, this form sometimes must be filled out.
The bottom line
Getting a mortgage is not impossible if you are self-employed. If you organise your documents well and make sure all needed documents are provided, you should have no problem going about getting a mortgage. As long as you can show a good credit history, proof of income and certified bank statements, you should not be denied a mortgage just because you are self-employed. Working with a financial adviser can sometimes take some of the stress of applying for a mortgage when self-employed and make sure you have all the needed documents for a mortgage approval. Many advisers offer their services free of charge, so it would not hurt to talk to one if you need a mortgage and are self-employed.
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