How To Get A Mortgage When You’re Self Employed

*This is a collaborative post on how to get a mortgage when you’re self employed. All words and opinions are my own

Navigating the mortgage market can be challenging for anyone, but if you’re self employed it can be even harder.

Lenders see the traditional model of employment as more straightforward and stable. And for most lenders it’s much more straightforward to apply for and get a mortgage approved. But this doesn’t mean self employed people can’t get a mortgage, it just requires a bit more prep.

When we applied for our mortgage we had both an employed person and a self employed person which I do think helped and made the process simpler. If you’re applying as a self employed person on your own, or as two self employed people it might take a bit more time.

Here are some tips on how to get a mortgage when you’re self employed.

Understand the process

Lenders view those who are self-employed as more at risk when it comes to income stability than those in salaried jobs. Sadly this is just the way it is. Even though employed people can sometimes be as much, if not more at risk of losing income. I know I’ve got more chance of being made redundant than Luke does of losing his income.

Self employed people need to demonstrate that their income is reliable and will be sufficient to meet mortgage repayments. This often means showing additional documents to prove financial stability. Lenders may scrutinise your financial history more than someone who is employed. Be prepared for questions around future earnings projections etc.

Gather your tax documents

If you’re employed you’ll probably only need to show two to three months of pay slips. But if you’re self employed it’s likely to be two to three years of tax returns. Seeing a few years worth of income can help them assess that you’re earning consistently and it’s less risky to lend to you.

If you’ve not submitted your latest tax return do it as early as possible, especially if you earned more than the year before.

Collate all the rest of your documentation

As well as your tax returns you’ll also need to show further documentation like anyone else. This includes bank statements for the last 3-6 months to show your cash flow and financial habits. You will also need to show your business bank account if this is where your income comes into.

Alongside your banking documents you’ll need proof of deposit that meets anti-laundering regulations. For example when we bought our house I had to show the documents from the sale of my flat which is where the money had come from.

Consider how much you can borrow

The general rule of thumb is employed people can borrow four to five times their salary. When you’re self employed lenders will consider your net income as opposed to how much you earn. So the figure after your expenses. This is where using a net profit mortgage calculator can be helpful, as it allows you to estimate your borrowing potential based on post-expense  income.

So be mindful that you may earn £50,000, but if you claim £10,000 of expenses you’ll only be seen as having £40,000 of income.

Be mindful of this when looking into properties ahead of time and make sure you know what you can borrow.

Save a larger deposit

A larger deposit can improve your chances of securing a mortgage and potentially lead to better rates. While the minimum deposit requirement is typically around 5% of the property’s value, putting down more can demonstrate financial stability and reduce the lender’s risk.

We put down a 15% deposit on our home and it dramatically reduced our rates.

Improve your credit score

You want to put yourself in the best financial position when applying for a mortgage so look into your credit score. A strong score is crucial for any mortgage application, especially so when you’re self-employed.

There are lots of things you can do to help it including paying bills on time, checking your residental address and reducing overall debt. Check 0ut your credit score for any issues or inaccuracies that could affect your score.

Here are some more ways to improve your credit score.

Work with a mortgage advisor

Using a professional who knows the market is an invaluable resource. Brokers will access to a range of lenders and mortgage products, and may have access to some exclusive deals and rates. This can include some lenders and offers specifically for self employed borrowers.

They can help navigate the application process and find the best deal for your situation.

Applying for a mortgage when self employed

Securing a mortgage as someone who’s self employed in the UK just takes a bit more planning. By understanding the process, having your documentation and putting yourself in the best financial position you should be able to secure a mortgage that suits your needs.