How Self-Employed Workers Can Get a Mortgage - More Than Accountants

How Self-Employed Workers Can Get a Mortgage

Of the countless numbers of people in the UK who have applied for a mortgage, it is believed that over 40% have been declined and, somehow, feel embarrassed and see themselves as failures. However, at More Than Accountants, we believe that financial advice has a lot more to do with the applicant not getting approved, rather than the applicant not doing enough to get a nod on the mortgage.

Research shows that people have misconceptions about the requirements on getting approved for a mortgage. These misconceptions often discourage them from following through and continuing their plans of owning a property.

Surveys reveal that about 33% of applicants find the application process taxing and may have been confused with all the counseling on their finances. Meanwhile, about 35% believe that they do not meet a certain income level and, therefore, feel that they are automatically disqualified. These data mean that a significant part of the populace have a potential to own a property but are adamant to apply for a mortgage because of those incorrect notions.

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About 4.8 million people in the UK are self-employed. A huge number of these people still believe that unless they earn a regular income and have accounts that have been up for at least three years, they would not be approved for a mortgage. But then again, this is just one of the common misconceptions and is not at all true. While it is correct that 50% of the time, companies decline applications from self-employed or contractual employees, a company survey shows that over 94% of applications coursed through our team were approved.

Improve Your Mortgage Chances Even if You’re Self-Employed

A lot of factors affect a lender’s decision when approving a mortgage. The following tips will improve your chances of getting approved even if you are self-employed:

  1. Get advice from a reliable broker. Brokers are experienced in the mortgage industry and are familiar with lenders’ criteria. A good broker will match your qualifications with the right lender.
  2. Review your credit file. Check your credit file for possible unfavorable entries that might affect your chances.
  3. Make sure you are part of the electoral system. To give your credit score a boost, be involved in your local council’s electoral roll.
  4. Keep your accounts updated. Making sure that payments are made on time is good for your credit record, which in turn gives your better chances of getting more competitive rates.
  5. Steer clear of payday loans. Lenders look at payday loans as indicators of financial difficulty and will often decline up-front. To avoid this, keep payday loans off your record.
  6. Beware of multiple credit checks. It is not advisable to use comparison sites because these sites often run multiple credit checks. Multiple credit checks may reduce your credit score especially if done within a short span of time
  7. Avoid maxing out your credit card. Credit cards that are used to the limit affect credit scores. Instead of maxing out one card, distribute your balance by using two cards.
  8. Minimum payments don’t make you look good. Similar to payday loans, minimum payments are red flags for financial difficulty. Also, always paying the minimum due won’t help in paying the debt. If possible, pay more than what the bank asks you to settle.
  9. Sort your deposit. If you have generous family members funding your deposit, it would be wise to sort your account early on.
  10. Work with your accountant on the use of business funds. When you use business funds, it is better to take regular withdrawals rather than taking a huge lump sum. Make sure your accountant can confirm these transactions when the lender runs a check.
  11. Prepare and file your documents. Check the required documents and make sure to prepare them early. Review the documents checklist we have provided.
  12.  Obtain an agreement in principle. An agreement in principle will garner you more property visits and offers from estate agents and lenders. This not only shows that your credit is in order, but also, ensures that the property you’re viewing is within your financial capabilities.

Documents Checklist When Applying for a Mortgage

Below is a list of documents that mortgage lenders will require you to submit if you are self-employed:

  • ID. Have your valid photo ID ready as proof of your identity. You may submit your driver’s license as long as it bears your current address
  • Proof of Address. As proof of your address, you will be required to submit a council tax, a utility bill or any financial statement. It is therefore advisable to change one of your accounts to postal statements
  • Employer. Secure copies of your payslips or P60s for the last three to six months. You may be required to submit your P60s for the last two years if you’ve received extra income such as bonuses or commission.
  • Limited company accounts. This requirement is for company directors where fully signed accounts for the last two years are required. Just make sure your latest accounts are less than 18 months old.
  • Personal Tax Returns. As a self-employed worker, you need to have three years’ worth of SA302s and a tax overview from HMRC. Although a year’s SA302 s usually sufficient, submitting three years’ worth will maximise your chances of getting good deals.
  • Contractors. Make sure you have copies of your contracts, signed by all involved parties and have your day-rate and expiry date, for the last 12 months. Rolling contracts or those that do not have an end date may also be submitted.
  • CIS or Umbrella. Prepare copies of your payslips for the last six months.
  • Bank Statements. Three months’ worth of bank statements showing your salary or three months’ worth of business bank statements showing the rental will also be required.
  • Deposit. Lenders will ask for a statement with your funds balance and a build-up of funds. Family members who have gifted you with funds will need to submit a letter confirming that they have transferred funds to you.
  • Background buy-to-lets. A Tenancy Agreement and three months’ worth of bank statements showing rent will be required for those who earn their income from their buy-to-let properties.
  • Life insurance or other protection. If you have a Life insurance, submit a copy of the policy summary. Lenders usually ask for this to see if you have something to cover the mortgage.

Advice for First-Time Buyers

Having sound finances will help you get the momentum that you need to pursuing the property that you want. This involves understanding the importance of deposits. Most lenders now ask for an up-front deposit equivalent to 5% of the total home price. So, if the property costs £500,000, you will be asked for a £25,000 deposit, leaving you with a £475,000 mortgage with added interest.

Additional information may be required from sole traders, limited company contractors, and freelancers for them to establish that they are good investments.

Sole Traders

You need to prepare at least one year’s worth of finalised accounts or an SA302, issued within the last 18 months, from HMRC if you are a sole trader.

Contractors and Freelancers

Lenders will require copies of your current contract or contracts for the past 12 months if you are a contractor or a freelancer working through a limited company. If these are not available, you may use your personal tax returns or company accounts instead.

Limited Companies

Lenders will require the latest year’s company accounts or personal tax returns, or accounts for the last two or three years if you are a limited company director.


Earnings and Affordability

Most sole traders and freelancers applying for a mortgage are caught with this question: how do lenders calculate my earnings? One of the most common and easiest ways to do this is for lenders to review your business’ net profit. If you are a limited company director, lenders will check your salary, and dividends or your share of the net profit. Meanwhile, if you are a contractor, your annualised day rate will be looked into.

Mortgage lenders use an “affordability calculator” to determine the loan amount. They may also look into your lifestyle, spending patterns, commitments, and dependents. These factors will affect their decision in determining whether you are eligible for a loan or not. If you want to know how much you can get approved for, you may use our mortgage calculator or speak to one of our financial advisors.

Common Problems People with Self-Employed Mortgages Face

Having only one year of accounts is one of the most common problems a self-employed worker faces during a mortgage application as most lenders require two to three years. Another common problem is a significant rise in your income because mortgage lenders usually take the average of your income for the last two or three years. Fortunately, More Than Accountants has access to a network of lenders and we can help you find your match even if you only have one year’s accounts or have experienced a surge in your wage during the last few years.

How More Than Accountants Can Help

If you are self-employed and have your eyes set on getting a mortgage, what better way to start your journey than getting in touch with a broker whose expertise is handling mortgages for self-employed workers and contractors? Think More Than Accountants.

At More Than Accountants, we live by our name and make sure you get what you’ve set your mind on. We are more than accountants; we are mortgage experts who will connect you with the best mortgage lender depending on your eligibility. We will help build your credibility and help you get approved for the mortgage that you need. With More Than Accountants, there is no way but up to mortgage approval. Call us to speak to one of our dedicated advisors and be on your way to being a property owner in the UK.

FAQs on Mortgage for the Self-Employed

Q: I have worked a 2-year contract, interrupted by 6-9 months of backpacking. What are my chances of getting approved for a mortgage? Should I stay in the UK for at least on year?
A: It is advisable to complete at least 12 months of a continuous contract immediately prior to applying for a mortgage.

Q: Compared to employed workers, what mortgage rates do sole traders usually get approved for?
A: Employed and self-employed people get the same rates.

Q: I have recently become a sole company director, but I still earn from my personal buy-to-let property. In terms of proof of income, what will I need to remortgage?
A: You can use your latest year’s accounts or SA302 as proof of income. Most lenders would want to see a minimum income of £25,000, but this does not apply to all. You may contact us so we can further discuss your options and work out what is best for you.

Q: I recently took out my mortgage and then changed status from being employed to self-employed. I have higher income now that I am a contractor. If I remortgage, should I expect a big increase on interest rate because of the change in my employment status? Should I stay with the same lender or should I be open to other lenders in the market?
A: We would not advise against considering other options in the market. In fact, we can help you find a lender even with a short history in contracting. Although most mortgage lenders prefer workers who have completed a minimum of 12 months’ contract, rates remain competitive and there are other lenders willing to accommodate self-employed people, especially experienced ones, who have worked shorter contracts.

Q: Will there be any issue if I work a three-year contract, or more, abroad even If I have taken out a mortgage in the UK?A: Some lenders might consider this, but the income would have to be in sterling.

Q: We have a limited company where my husband and I each have 50%. I have been a director for about six months, while my husband has more than ten years of experience in our industry. I only have experience in our company. Will we have difficulty getting approved for a mortgage together because of my lack of outside experience?
A: Yes, it will be more challenging getting approved for a mortgage because lenders might deem six months as a little too short for a period of self-employment. However, you might still have a chance if this were a contract worker situation and if you apply for the mortgage in joint names.

Q: As husband and wife, we each have 50% of shares in our limited company. Should we apply for a joint mortgage so we can get a greater take home?
A: Yes. Not only do lenders advise couples to apply in joint names, but doing so also means all income will be used, resulting to higher loan amount.

Q: My wife who is not working has 50% of shares in my limited company. I included her so she can take dividends and so we would pay less dividend tax. Will this affect my mortgage application in any way?
A: This will not affect your application as long as you apply in joint names. The lender will base your maximum loan amount on 100% of your salary and dividends shown in your company accounts or personal tax returns.

Q: I am a freelancer with a limited company. If a mortgage lender asks for my income, should I input the company’s income for the year?
A: Lenders calculate your income based on your salary and dividends or share of profit if you have a limited company. However, if you are a contract worker, you might have better borrowing potential as the lender uses your day rate contract in calculating your income.

Q: If I have a limited company, is it better to have one major client each year than have multiple ones?
A: Mortgage lenders only look at your profit figures based on your company accounts. There is no way for them to check how many clients you have, so this should have no bearing on your application.

Q: What is the ideal percentage of deposit? If I make a higher deposit, would things be easier and smoother for me?
A: Most lenders usually require a minimum of 5% deposit. A bigger deposit would mean having more options for lenders. Each 5% increase in deposit also improves interest rates offered.

Q: If I have less than two years’ worth of accounts, would I be able to move house and get another mortgage?
A: Yes, it is possible. You are only required to submit at least one year of finalised company accounts or personal tax return.

Q: I used to hold a regular position prior to being a freelancer and I’m coming to the end of a discount period. If I stay with my lender, will an affordability check be run on my current income before I get a new deal?
A: If there are no other changes involved, we can just change your rate without any underwriting.

Q: Will my chances of obtaining a mortgage be affected if I do my own accounts instead of having an accountant?
A: You will only need to provide SA302s and tax overviews as proof of your income if you’ve completed a Self-Assessment. If you are a contractor, you can use your current contracts to validate your income.

Q: I work a full-time job while doing freelance work on the side. If I apply for a mortgage, will both my full-time and freelance income be considered?
A: To prove your income, you will need to complete at least one year of Self-Assessment. Sustainability is what lenders generally consider, so you need to make sure your hours add up and you must establish that you did not get the extra freelance job just to get the mortgage.

Q: I’ve consistently been earning great in the last few years. However, this year, my income dropped. Will lenders only review my current tax year or will they also check previous Self-Assessments?
A: If there is a decrease in your income, lenders will look at your accounts or tax returns within the last 18 months.

Q: I have worked in this industry for more than 15 years and I am planning to start contracting. If I have plans to move home, what are my chances of getting a mortgage?
A: You have good chances of obtaining a mortgage, provided that the new contract is for a position in the IT industry or has a value of £75,000 per year or £500 per day.

Q: Apart from my full-time job, I also work as a Hermes driver. Can I use my income from driving when I apply for a mortgage?
A: Yes, as long as you submit at least one year of personal tax return.

Q: What is the minimum income needed to obtain a mortgage?
A: There is no minimum income when applying for a mortgage. However, lenders use a certain affordability model to calculate the loan amount. Incomes lower than £10,000 might only be enough for standard costs of living, hence, loans released might also be lower.

Q: If I have a negative equity, can I switch to a different mortgage provider to get better rates?
A: While some lenders offer rate switches, most providers do not allow switching while customers are in negative equity. However, it would be better to contact your provider to discuss your options. You may also get your property value estimated to see how it compares with the current market value of similar properties.

Do you need further assistance?

More Than Accountants has a dedicated support team that will be happy to assist you. Contact us to speak to one of our advisors.


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