If you work for yourself, the mortgage process can feel daunting before you have even started the application.
Many self-employed borrowers still believe lenders favour salaried applicants. There is a perception that self-employed income is treated with suspicion and that approval will be much harder to secure.
In reality, that is not quite the case. Being self-employed does not stop you getting a mortgage.
But lenders will usually want a clearer picture of how your income works and whether it is likely to continue.
That extra scrutiny is what makes the process feel more complicated.
For someone in full-time employment, income is relatively straightforward to verify.
Payslips and an employment contract usually tell the lender everything they need to know.
Self-employed income can look very different. Earnings may fluctuate year to year or come from multiple sources such as business profits, dividends, contract payments or consultancy work.
From a lender’s perspective, the goal is simply to reduce uncertainty. The more complex the income, the more evidence they will want to see before approving the loan.
Payslips and an employment contract usually tell the lender everything they need to know for employees
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GETTYIt is also important to understand that lenders do not assess every type of self-employment in the same way.
Most mortgage providers will consider you self-employed if you own around 20 per cent or more of a business that generates the majority of your income. However, this threshold can vary depending on the lender.
Sole traders are usually assessed on the net profit shown in their tax returns. Partners are assessed on their share of the partnership’s profits. Limited company directors are typically assessed on salary and dividends, although some lenders may also take retained profits into account.
Contractors and freelancers can sometimes be assessed differently again. Some lenders will work from contract income, while others prefer to see a longer track record through accounts.
The good news is that there are several practical steps self-employed borrowers can take to improve their chances of getting approved.
Sam Fox, co-founder of the UK Mortgage Centre | Sam Fox
Five ways self-employed borrowers can strengthen a mortgage application
1. Build a solid trading history
Most lenders prefer to see at least two years of accounts or tax returns. This allows them to understand how your income has performed over time.
If you have been self-employed for less than two years, a mortgage may still be possible, but the choice of lenders is often more limited.
A longer and more consistent trading history will almost always put you in a stronger position.
2. Keep your paperwork organised
Self-employed applications rely heavily on documentation. Lenders will normally request accounts, SA302 tax calculations, HMRC tax year overviews and business or personal bank statements. If you run a limited company, they may also want to see dividend records and company accounts.
Having this information ready can speed up the process significantly.
3. Demonstrate stable income
Consistency is important.Lenders tend to favour applicants whose income is stable or gradually increasing. Large swings in earnings from one year to the next can sometimes reduce the amount you are able to borrow.
If your income has grown strongly, some lenders may focus on the most recent year’s figures rather than averaging multiple years.
4. Strengthen the rest of your financial profile
Income is only part of the affordability picture.A strong credit score, low levels of unsecured debt and a healthy deposit can all improve your chances of approval.
The stronger the overall financial profile, the more comfortable lenders are likely to feel.
5. Speak to a specialist adviser
Not all lenders assess self-employed income in the same way.Some are far more comfortable dealing with complex income structures such as contract earnings, variable profits or retained company income.
Getting advice before applying can make a huge difference. An adviser can help match your circumstances with lenders who are more likely to understand how your income works.
The bottom line
Being self-employed does not automatically mean you will pay higher mortgage rates.In many cases, self-employed borrowers have access to the same products and pricing as salaried applicants.
Where rates can become less competitive is when only specialist lenders are willing to consider the case.
In most situations, the key issue is simply whether your income is clear, provable and sustainable in the eyes of the lender. With the right preparation and the right advice, many self-employed borrowers are actually in a stronger position than they realise.
Property and mortgage expert Sam Fox is the founder of UKMC. For more information visit www.ukmc.co.uk