Mortgages for self-employed buyers

Getting a mortgage when you're self-employed can be tricky. Without a contract of employment or regular payslips, it can be tough to convince lenders that you're a safe bet.

But don't despair - with a decent deposit, plenty of planning and some financial discipline, it is possible to get a home loan.

Video: self-employed mortgages

Check out our short video below for a quick guide to how mortgages for self-employed people work.

Getting a mortgage when you're self-employed: the basics

There's no such thing as a 'self-employed mortgage': you'll be applying for the same mortgage products as homebuyers who are employed by companies.

For self-employed applicants, mortgage lenders generally require at least two years of accounts signed off by a certified or chartered accountant. However, the more records you can provide, the better.

If you can show a consistent or increasing profit over a number of years, this will help your application, as lenders look at average profits over a period of time to assess your risk profile.

If your income varies dramatically from year to year, you might need to provide further evidence of future income, such as new clients or contracts, or be able to prove that you have a significant amount of savings.

Lenders will usually require a deposit of at least 10% of the purchase price if you're self-employed, which means you're likely to be excluded from applying for a 95% mortgage.

If you can meet the bank's eligibility criteria, you'll usually be allowed to borrow up to four-and-a-half times your annual household income, although this varies between lenders.

• Find out more: applying for a mortgage

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How to find a mortgage lender

If your income is fairly consistent and you've been self-employed for a long time, you should be able to get a mortgage with a high-street bank or building society.

Unfortunately for self-employed workers, some major lenders conduct strict score-based assessments modelled on full-time permanent employment, which in some cases can mean you're offered a smaller sum or your application is rejected altogether.

If you're struggling to find a suitable deal, your best chance may be speaking to a lender who will refer you to an underwriter, meaning a person who will manually assess your application. An underwriter may be able to take into account factors about your employment history and expertise that are overlooked by a rigid points system.

As a starting point, it's worth taking advice from a whole-of-market mortgage broker, who will be able to offer advice on the best lenders for self-employed applicants.

• Find out more: best mortgage lenders

How self-employed applicants are assessed

If you're self-employed, your situation will generally fall into one of the three categories below. This will affect how your lender assesses you.

If you're thinking of changing company type (for example, you're a sole trader thinking of registering as a limited company), it's sometimes worth waiting until after you've been accepted for a mortgage to do this, as company changes can have an adverse effect on your application. This will vary depending on your circumstances, though, so talk to a mortgage adviser if you're unsure.

Sole trader

If you're a one-man band, you (or your accountant) will declare your income using self-assessment and have your tax calculated by HMRC. Once you've done this, you can ask for an SA302 form, which outlines your total income and tax paid. Lenders will then base their mortgage calculations on this information.

Partnership

If you're in business with someone else, mortgage lenders will look at your individual share of the profits.

Limited company

If you form a limited company, you'll be keeping your business accounts separate from your personal ones. As a director, you'll usually pay yourself a salary and dividend payments, which will both be taken into account by lenders when you apply for a mortgage.

If you choose to retain profits in the business rather than drawing them out, this can create difficulties, as some lenders don't factor retained profits into their calculations.

• Find out more: Do I need life insurance for a mortgage?

Applying for a mortgage as a contractor

If you work as a contractor, much of the above will also apply to you. As with other self-employed people, lenders will be looking for signs of long-term security - so if you can produce an ongoing agreement with an employer, or evidence of past agreements that are likely to be renewed, this may make your application more appealing.

While taking breaks between stints may be one of the perks of contracting, minimise time off in the lead-up to buying a home - lenders may be wary if they see you out of work for more than eight weeks in a 12-month period.

How lenders assess day rates

Some lenders may be willing to calculate your annual income on the basis of your day rate, although you might need a 12-month contract for this to be an option.

Lenders will take your daily rate and multiply it by the number of days you generally work per week, then multiply that out to the full year. Be aware that lenders will also want to factor in any holidays and gaps between contracts, so most will assume you only work between 46 and 48 weeks per year.

Day rate example

If your day rate is £400 and you generally work four days per week, your estimated annual income would be around £76,800.

• £400 x 4 days = £1,600 per week
• £1,600 x 48 weeks = £76,800

How to improve your chances of being accepted

Getting a mortgage isn't a five-minute job; it's useful to prepare for an application well in advance of making one. You can improve your chances of getting it right the first time by following these tips.

Use an accountant

It's vital to employ a certified or chartered accountant to prepare your accounts. Indeed, some lenders won't consider applications from self-employed people who don't have up-to-date accounts signed off by an accountant.

It's worth bearing in mind, however, that while it's common for accountants to legally minimise your declared income so that you pay less tax, this could have an adverse effect when you apply for a mortgage, as your accounts will show a smaller profit.

• Find out more: income protection insurance explained

Complete three SA302 forms

SA302 forms provide annual tax calculations, and most lenders will ask for three (one for each of the past three years) when you apply for a mortgage. That said, some lenders will accept two.

If you've sent your self-assessment tax returns online, you can print off your SA302 calculations. If you filed your accounts by post, you'll need to contact HMRC and allow up to two weeks for your forms to arrive.

• Find out more: tax for the self-employed

Save a bigger deposit

As with any house purchase, the bigger the deposit you've got, the easier it is to secure a mortgage at a good rate. Most lenders require a deposit of at least 10% from self-employed applicants, and if you don't have a long history of accounts, you might need a bigger deposit to convince a lender that you're a safe bet.

Get your finances in order

Before you apply for a mortgage, give your finances a spring clean.

First, boost your credit rating by paying off any debts as soon as they're due, closing dormant accounts, ensuring there are no incorrect entries on your credit report and getting on the electoral roll.

You should also be careful about your spending habits in the year before you apply, as all regular outgoings will be taken into consideration by your lender.

Take professional mortgage advice

If you apply for a mortgage and the lender rejects you, it will be recorded on your credit file. This can damage your credit score and, in turn, make it less likely that you get accepted by the next lender you apply to.

With this in mind, consider using a mortgage broker, who will be able to analyse your financial circumstances and find the right deal for you.