Is it Difficult to Get a Mortgage as a Self-Employed? Tips and what to Watch out for

11 min
Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Securing a mortgage as a self-employed can be challenging, but it is certainly not impossible. Understanding how to increase your chances of being approved for one as a self-employed and what documents you need to gather can help you secure one.

In this guide, we covered ways you can increase your chances of getting approved for a mortgage if you are self-employed and the documentation you need to gather. We also highlighted who most lenders consider self-employed and why it can be harder to obtain a mortgage if you are self-employed. 

Who is Considered Self-Employed in a Mortgage Application? 

The exact definition of who is self-employed differs depending on the mortgage lender. However, a lender will consider you self-employed if you own at least 20–25 per cent of a business whose proceeds constitute your primary income.

Furthermore, if you work as any of the following, you are considered to be self-employed: 

  • Sole trader: As a sole trader, you own and run the entire business yourself. In other words, the responsibility for the business is solely yours. Although a business registered as a sole trader may have only the owner, it may also consist of the owner and other employees. Nonetheless, the sole trader remains in charge (has total control) over the entire business. 
  • Director or partner of a limited company: Here, the directors, partners, and shareholders share responsibility for a business. In other words, the responsibility is not solely on one person.
  • Contractor: A contractor usually provides services or skills for a company on a fixed or contracted basis, either by hours or project duration. A lender could consider a contractor a worker or an employee if employed through an agency or umbrella company. But if a contractor is a sole trader or runs a limited company, they are self-employed.
  • Freelancers: A lender will probably consider you self-employed if you work as a freelancer falling into the sole trader or contractor category (completing individual projects or working for a set period).

Note: Generally, if you have sole or shared responsibility for a business’s success or failure, you will likely be considered self-employed. On the other hand, agency employees and those paid via an umbrella company are not likely to be considered self-employed. However, when seeking a mortgage, agency and umbrella workers may face the same challenges as self-employed applicants, such as proving regular income. 

Why it may be Harder to Secure a Mortgage if you are Self-Employed

As mentioned earlier, being self-employed can make it more difficult for you to obtain a mortgage. Here are some reasons why you may struggle to secure a mortgage as a self-employed.

#1. Irregular Income

One of the first things mortgage lenders seek and prefer is applicants with a steady, verifiable income stream. Unfortunately, those considered self-employed often have irregular incomes, which makes it more challenging to get a mortgage.

Proving you have a steady income can be difficult if you are self-employed, especially when you take time off, or business is slow. A lender may view slower months as having a lower typical or average income, which could reduce the amount you can borrow.

#2. Not Knowing the Best Mortgage Lender to Approach

Some mortgage lenders automatically assume that lending to self-employed borrowers carries greater risk than lending to employees. This implies that if you are self-employed, you risk wasting your mortgage application on a cautious lender. Sadly, receiving too many rejections can lead to rejection itself.

Some lenders utilise automated assessments and algorithms. This further complicates the process and could be an issue if you have a more complex income and would benefit from a manual underwriter. Sadly, this kind of information is not often made public.

Although you can do little to affect lenders’ caution when dealing with self-employed applicants, speaking to a mortgage broker can help ensure you choose the most suitable lender to approach.

#3. Affordability

As a borrower, lenders ensure that a mortgage is affordable to you. They typically accomplish this by stress-testing your ability to repay your mortgage with scenarios like a rise in interest rates by one, two, or even three per cent. Given how the cost-of-living issue affects people’s budgets, many borrowers will find this extremely difficult to prove.

Furthermore, a lender may not consider you affordable even if you pass the stress test. This can happen if the lender doubts your business’s stability or long-term survival. This doubt could be fuelled by your industry or because you have just started working for yourself. 

Consequently, this could result in outright rejection of your application or a limitation on the amount you can borrow. Again, this information (on the lender’s definition of affordability) is rarely public knowledge and subject to change. 

Fortunately, a good mortgage broker like us has access to this information, so contacting us can help you succeed in your mortgage application.

Factors that may Affect the Amount you can Borrow

The question of how much a lender can lend you has no distinct answer. In the past, lenders would multiply your income by up to five times to get the amount you can borrow. Now, they also need to check the mortgage affordability.

In other words, you must prove that you can afford the repayments. This can be simpler to estimate for employees, but for self-employed, it will depend on your peculiar situation. 

Here are some of the factors that lenders will consider when determining how much to lend you:

  • The number of applicants for the mortgage: When determining how much to give out, lenders consider if you are the only one applying or if it’s a joint application. The amount you can borrow is likely to be more if there are multiple income streams.
  • Applicant’s monthly total outgoings: Lenders will inquire about your income and outgoings. Outgoings they often check include meals, entertainment, weekly shopping, Council tax, child care, subscriptions (such as Amazon Prime, Spotify, and Netflix), etc. To augment these details, many lenders will use data from the Office for National Statistics and may also add an extra safety margin. The essence is to help them determine how much to lend you and if you can afford the repayments.
  • Ability to keep up with repayment even if interest rates rise: Lenders will require proof that you can afford mortgage rates at the current level. They will also put you through a stress test to determine your ability to keep up with repayments if interest rates increase. This gives them a more accurate idea of how much they should lend to prevent payback issues.
  • How creditworthy you are: A poor credit report (which contains information about your credit history) can prevent you from securing a mortgage. Credit score systems differ among lenders and are subject to change. Some mortgage lenders determine creditworthiness based on your loan-to-value (LTV). For instance, the test may be tougher at 90% LTV than at 85% LTV.

Lenders may limit the amount to lend or turn down your application if you fail to convince them based on the facts above. Here are a few more limitations you should know:

  • Lenders often set a borrowing cap of approximately 4.5 times your income. However, some lenders may stretch this up to 5.5 times your income. The best way to find out is to consult a mortgage broker.
  • Some lenders may limit the amount self-employed applicants can borrow. For example, some lenders limit the amount you can borrow once you reach a given LTV, while some will not lend to self-employed applicants above a particular LTV. 
  • Lenders may consider business costs under your name instead of your company’s. For instance, while a car lease can be considered a business cost for tax purposes, a lender will often include it as a personal cost when evaluating affordability.

How to Increase Your Mortgage Approval Chances as a Self-employed

Doing everything you can to increase your chances of securing a mortgage is vital before applying for one. For the self-employed, this is crucial. Here are some of the things you can do to boost your chances of acceptance:

#1. Check your Credit Report

Your credit report affects the lender’s decision to approve or reject your mortgage application. You should be able to convince lenders that you possess the financial discipline required to repay the mortgage. Therefore, you must ensure your credit report is in perfect shape before applying for any mortgage. 

To achieve this, check your credit report before the mortgage lender does. Checking before the lender does allows you to make improvements where necessary, increasing your chances of securing a mortgage. You can check out our ‘Hot Tips to improve your credit score’ guide to learn ways to increase your credit score.

#2. Register to Vote 

It is very challenging to secure a mortgage without being on the electoral roll, even though you can have a perfect credit report without it. Lenders use data from the electoral roll for identity checks. The identity check is to verify that you are who you claim to be, reside where you claim to reside, and that you are not laundering money.

#3. Avoid Applying for Credit Shortly Before Getting a Mortgage

Another strategy to increase your chances of securing a mortgage is to avoid applying for credit at least three months before getting a mortgage. This lowers your risk of rejection and raises your credit score. Some advise not applying for credit at least six months before your mortgage application to be safe.

Lenders search your credit file when you apply for a credit card, loan, or overdraft. Even if you decide not to take out the contract, this search (also referred to as a hard credit check) is already registered on your file. You are less likely to get credit if you have more searches within a short period because it makes you appear desperately seeking to borrow.

#4. Cut Back on Spending and Limit the Amount of Expenses You Approve

To determine affordability, lenders check your bank statements dating back at least three months, sometimes much longer. They can also check your outgoings from your bank statement. Thus, you need to cut back on your spending before applying for a mortgage.

Also, limiting the amount of expenses you approve will boost your chances of securing a mortgage. Signing off many business expenses in the months before applying could give the impression that you have a lower income.

#5. Make a Bigger Down Payment

In general, a larger deposit increases your chances of being approved. It also increases your borrowing power and your chances of accessing better mortgage rates. 

Other ways you can increase your chances of securing a mortgage is to:

  • Ensure good record-keeping so you can clearly and concisely prove affordability.
  • Refrain from altering your business model.
  • Get an Agreement in Principle (AIP) — a conditional offer saying that your application for a mortgage could be approved based on a quick check of your credit file and income. 

Documentation you need to Gather When Applying for a Mortgage as a Self-employed

After taking all the necessary steps to increase your chances of being approved, the next step is gathering the documentation that will back up your application. The documentation required for your application depends on how your business operates and your lender and often includes the following: 

  • Trading accounts: lenders usually require two years’ worth of your trading account and even three sometimes. Lenders typically consider your average net profit, not your turnover. Also, note that lenders usually prefer accounts prepared by chartered accountants to ensure you are reliable. If not, you may only find fewer lenders to work with.
  • SA302 and Tax year overview forms: lenders often ask for two and sometimes even three years’ worth of these. Although some smaller lenders can use these forms in place of your trading accounts, many require them in addition to your trading accounts.
  • Bank statements: Lenders usually require your last three months’ bank statements. Some lenders even ask for six months’ worth. They need your bank statement to see your incomings and outgoings. They also want to have an idea of how much you spend on bills, transport, child care, credit card and loan repayments, vacations, etc.
  • Proof of current and upcoming work: lenders will ask you for this if you are a limited company director or a contractor. For company directors, lenders may require business plans and projected income statements. For contractors, they may ask for signed contracts of current and upcoming work.
  • Proof of identification and deposit: Proof of identification is required to prove who you are and your place of residence. Lenders often ask for your passport, driving licence, utility, and council tax bill for this. You may also need to provide to provide copies of your bank or savings account statements for proof of deposit.
  • An up-to-date CV: If you are a contractor, preparing an up-to-date CV (containing a list of undertaken contracts) could also be beneficial. The more robust your CV is, the more lenders will see that you can successfully transition between jobs and secure new ones. It can also help show your sectors and areas of expertise.

Note: It is vital to start this documentation-gathering process on time. Gathering paperwork at the last minute might add to the stress of a situation that is already challenging.

Conclusion

If you are self-employed, getting a mortgage can be too much of a challenge. However, speaking with a specialised mortgage broker like us can significantly simplify the application process and increase your chances of getting approved for a mortgage. 

FAQS

Do you have more borrowing power when you apply jointly?

Yes. Joint mortgage applications allow for higher borrowing limits due to two sets of income supporting the application. However, since self-employed borrowers are likely to face greater scrutiny than employed borrowers, it is ideal to name an employed borrower the lead applicant where possible.

What happens to my mortgage application if I have gaps in my work history?

Sometimes, a significant gap between contracts can hinder your mortgage application. Generally, any break in work over eight weeks will be an issue. However, some lenders might consider an application if the break is due to a significant life event or professional development.

If I have not been self-employed for long, can I still get approved for a mortgage?

Obtaining a mortgage with less than two years of documentation is not impossible, but it can be challenging. Also, there will be fewer lenders available, and the ones willing to consider you will carefully examine your affordability. They may even need you to have had previous experience in your line of work before you founded your business.

How long does it take to receive a mortgage offer?

Receiving a mortgage offer should take about a month. If your situation is simple, it can be quicker. However, proving your affordability may not be simple, and this may make your application take longer before its approval. 

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Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

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