Self-employed mortgage rules: how do I get one?

Getting a mortgage when you are self-employed can be more of a challenge but it’s still possible.

If you are self-employed and hoping to get a mortgage then it helps to be aware banks will be cautious about lending to you because they fear if work suddenly stops, you won’t be able to make your mortgage repayments.

While you may need to jump through more hoops to prove to a bank you have a reliable income, there are still ways to get a mortgage when you’re self-employed.

This article will cover:

• Can I get a mortgage if I’m self-employed?
• Can I get a mortgage after one year of self-employment?
• Can I get a buy to let mortgage if I am self-employed?

Use our mortgage calculator to work out how much you can afford to borrow.

Can I get a mortgage if I’m self-employed?

Being self-employed isn’t a barrier to being accepted for a mortgage, but you might find there are more hoops to jump through. 

Self-employed borrowers are generally viewed as more risky because there is no stable employer to vouch for their salary. 

As a result, providers require more information to prove the borrower has the “right track record”, says David Hollingworth at broker L&C Mortgages. 

These requirements differ from one lender to the next. 

Tighter lending rules came in 2014 in the form of the Mortgage Market Review. 

It placed a bigger burden of proof on the lender to establish that the borrower could afford the loan repayments. 

Nowadays most lenders will offer exactly the same mortgage deals to self-employed mortgage applicants as to any other borrower

David Hollingworth at the broker L&C Mortgages

That meant proving they could make both the repayments but also their regular outgoings such as bills each month.

“That would typically need to be shown over the last two or even three years, to give some reassurance that the income levels will be adequate and should be sustainable over time,” Hollingworth adds.

Can I get a mortgage with one year self employment?

You are likely to require a more specialist lender who accepts one year of self-employment history, rather than a minimum of two or even three years self- employment history as is more common with most lenders.

You may also wish to consider using a mortgage broker to recommend the providers most likely to approve you. 

Times Money Mentor can help you choose a mortgage with this comparison tool. 

Find out more: How to become a freelancer 

Do I count as self-employed?

While it may sound a daft question, lenders have criteria for what counts as self-employed.

A sole trader is a standard definition, but you will also fit the bill if you are a partner on a self-employed basis, or if you own a stake of 20%-25% or more in a limited company from which you earn your main income.

If you are a partner in a limited liability partnership, you are also treated as self-employed by lenders.

How long do you have to be self-employed to get a mortgage?

Most lenders ask for at least two years’ worth of accounts in order to consider a self-employed applicant. 

Those with especially complicated finances, says Hollingworth, may be referred to an underwriter. 

Different rules apply depending on your employment status: 

• Self-employed – Lenders usually require the last two or three years of accounts plus three months of bank statements. 
  Subject to the Lender, you can either supply your business accounts yourself or get a reference prepared by a qualified accountant. 
  If you file a self-assessment tax return, lenders will likely look at the profits you make and may require additional evidence. This could be, for example, upcoming contracts or clients that indicate that you will continue to earn similar sums in the future. 
  Find out more: How to pay taxes as a freelancer 
• Partner – If you are a partner in a business from which you earn your primary income, then you are likely to be treated in a similar way to self-employed borrowers, except that lenders will look at your share of the net profit when calculating what to lend to you. 
• Limited company directors – While technically you are not self-employed you still face the same issues proving a reliably consistent income. 
  Your income may be irregular and made up of a combination of salary that you pay yourself and of dividends. 
  Some lenders take both components into consideration and subject to the lender you are likely to need to provide at least two years of company accounts. 
• A mix – It is possible that you work through a limited company but also carry out regular work for companies that pay freelancers via PAYE. 
  If this is your arrangement, you may fit some lenders’ bespoke contractor terms; in essence, this typically involves the lender taking your weekly rate (day rate times five) and multiplying this by either 46 or 48 weeks to get an equivalent annual “salary”. 
  Those who have a blend of income sources can still be serviced by specialist lenders that will take into account both self-employed and PAYE earnings. 
  This can be especially true for high-net worth individuals with access to private banks accustomed to dealing with varied and complex income sources. 

The maximum amount of borrowing available will depend on multiple factors, including the lender’s affordability criteria and your outgoings. 

How do you qualify for a mortgage if you are self-employed?

Lenders may also want a copy of an SA302 form for self-assessment taxpayers, or a tax year overview from HMRC for the past two years. 

The SA302 Tax Calculation is used by those who get paid outside the PAYE system so they can prove their earnings and any deductions for the previous tax years. 

Contact HMRC for a SA302 form as soon as you are thinking about applying for a mortgage as it can take weeks to arrive. 

You will need your national insurance number and self-assessment unique taxpayer reference (UTR) 

This will help you to prove your current and previous earnings to a lender, but you will also have to show proof of future expected income. 

Company directors will likely need evidence of salary and/or dividend payments. Contractors will likely be required to provide a copy of their current and previous contracts. You may also be asked for evidence of future clients or upcoming contracts or commissions. 

This is particularly important for those who are newly self-employed and only have one year or less of accounts. 

Qualifying for a mortgage is not impossible, though your choices are likely to be more limited if you’re self-employed. The more evidence you have, the better. 

You should consider preparing six months’ worth of bank statements, too. 

What else do lenders want to know?

Lenders don’t just look at the documents that you give them; they may quiz you in more detail about some of the aspects of your spending. 

This can include your household bills, commuting costs, credit card repayments and childcare. 

Bank statements may as well be scrutinised to see how much you spend. 

As with any borrower, says Hollingworth, a mortgage lender will also want to carry out a credit check to make sure that you have a history of handling credit responsibly. 

They may also use internal credit- scoring models, based on lots of different factors, to help them reach a decision. 

Sometimes an accountant’s reference is also requested, or, in the case of an LLP partner, a letter from financial directors of the company. 

How can I make myself more attractive to lenders?

1. Get credit ready – At least a year before you know you will want to buy a house, check your credit score. Equifax, Experian or TransUnion are the main ones.
   The higher your score, the greater the chance you will be offered credit. Make sure there are no errors on your report and to try to take steps to improve your score in advance.
2. Sort out your spending – Before offering you a mortgage, lenders like to go through your bank statements.
   It isn’t because they are nosy; they want to know that you will be able to make your repayments and aren’t already overstretching yourself.
   It might be best to cut back on the unnecessary outgoings for a while. 
3. Save, save, save – The higher your deposit, the more mortgage options will be available to you. If you only have one year of accounts, it is likely you will need to save a much bigger deposit to increase your chances of being offered a loan.
   This might mean drawing up a budget, cutting back on some spending or changing jobs.
   If you are a first-time buyer aged between 18 and 39, you can save up to £4,000 inside a Lifetime ISA and get a 25% bonus on top.
4. Consider speaking to a mortgage broker – Each mortgage provider will have their own lending criteria when assessing borrowers; some will take several forms of income into account, including freelance earnings, while others will not.
   A broker can help you to find both the best deal on the market and minimise the complexity and hassle involved in the process. A broker can help you manage expectations from the outset, of what you will be able to borrow, and help you prepare your application so that it has a better chance of being accepted. 
5. Be honest – Don’t try and hide anything or “forget” to disclose any relevant information that you feel may jeopardise the loan.
   This is the worst thing to do and will always be picked up at some stage. Speak honestly and openly to a broker, who can also help you present your application to a lender in the best possible way.
6. Be organised – Understanding what your paperwork will show is very important, says Hollingworth at L&C Mortgages, and having everything up to date and ready to go will help smooth the process.
7. Be super organised – Get your latest tax return done as soon as possible after the current tax year has closed. Lenders may be more confident if they can see the figures over the past year.
8. Get an accountant – Some lenders will only consider mortgage applications that have been signed off by a certified accountant.
   The accountant can also make sure that all the details on your accounts are accurate and the sums all add up.
9. Think about expenses – While legitimate business expenses can bring down your declared profit – and as a result you will pay less tax – they could also have an impact on the amount that you can borrow.
   If you can, it might be best to hold off on any non-essential business expenses in the years running up to your mortgage application.
10. Be proud to be self-employed – You had the guts to go out there and try to make your business work. You will be surprised at how far passion for what you do and confidence in yourself will take you.