With 4.8 million people across the UK who are registered as self-employed, it may come as a surprise that many who run their own business or work freelance still view their chances of obtaining a mortgage as overly difficult. However, if you’re thinking of buying this year and you are self-employed, then there are a few things that you can do to maximise your chances of being approved for a mortgage.
Pre-2007, when the so-called 'credit crunch' hit the UK market, those who were self-employed and looking to obtain a mortgage would do so via a self-certification mortgage. These loans required very little paperwork in terms of proving income, however, and led to an abuse of the system with applicants over-stating their income in order to gain a larger loan amount. Due to this practice, these mortgage variants were banned and those looking for a mortgage application through the same routes as others who aren’t independently employed.
These days, if you are self-employed and looking for a mortgage, then the application process is the same as if you were employed externally, but there are some steps you can make to improve your chances:
An accountant will help you to get all of your finances together and will also be able to offer the best advice in terms of balancing the tax that you pay and the status of the business; some people who are self-employed pay themselves less in order to lessen their tax, but be advised that this may harm your mortgage application.
The structure of your business will also have a bearing upon the success of your mortgage application – so think about whether it will pay dividends in the long run to change from being a sole trader, to a partnership or limited company. Do keep in mind that the finance structure of your company will also be taken into account – for example, Director’s Loans (money that you have put into your business) will not be classed as income. The only considerations for a mortgage application are a declared salary and dividends paid out.
Being organised is, of course, tacit for anybody applying for a mortgage, but if you are self-employed then this becomes even more important. Depending on how long you have been self-employed for, you will have to be able to provide at least two years' worth of accounts. If you haven’t been in business for that long, then providing a strong previous employment history is an absolute must to prove that you are a safe place for a lender to give a mortgage to.
The fundamentals of mortgage application remain the same for whether you are self-employed or not. Maintain a strong credit history, and if you have blemishes on your record then work on improving these before you set about your application for a mortgage. Shopping around is also a must – different lenders will be able to offer you different mortgage structures, one of which may fit you best, so don’t be tempted to just say yes to your first mortgage approval. Finally, having a sizeable deposit will impact the rates which you end up paying on your mortgage, therefore waiting until you have a larger deposit to be able to put down on a property may be worthwhile in the long run.
