Top tips on how to get a mortgage if you're self-employed

Britain’s housing market boomed throughout much of 2020, as the coronavirus-induced lockdowns and government stimulus measures fuelled surging demand for new homes.

Low interest rates and stamp duty cuts in England and Northern Ireland, have made buying a new home easier for many buyers. But the crisis has also made it harder for some to get on or move up the ladder —including many self-employed workers.

Surveys suggest three in 10 of the self-employed were out of work in April at the height of the first nationwide lockdown. Many freelancers in the arts, events, hospitality and other hard-hit sectors have not been eligible for government income support.

But on top of the hit to their livelihoods, some self-employed workers also now face further challenges convincing potential lenders to grant them mortgages.

“Lenders have made it harder for self-employed borrowers to get a mortgage since COVID-19 struck,” said Jonathan Harris, managing director of mortgage broker Forensic Property Finance.

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Some banks have tightened eligibility rules to limit perceived risks. Nationwide cut its maximum loan-to-value ratio to 85% in late October. It meant self-employed borrowers needed at least a 15% deposit, whereas employed borrowers only needed a 10% deposit.

“This is frustrating as it doesn’t make sense that the self-employed are considered a greater risk than the employed,” Harris told Yahoo Finance UK. Noting many small and medium-sized firms’ directors were self-employed, he added: “If the self-employed are a greater risk, then what is the logical fate of those employed by them?”

There are things that self-employed workers in a position to buy their own home can do to boost their chances of being swiftly approved for a mortgage, however.

Be as prepared as possible

Lenders may ask self-employed applicants for more paperwork than their employed peers, making thorough preparation in advance essential.

“Get all your documentation together, including the past six months of bank statements, both personal and business, well in advance,” said Harris.

Nima Ghasri, director of property buyers GoodMove, agreed: “Preparation is key.”

She recommended compiling in advance:

• At least two years of certified accounts.

• HMRC documents proving earnings, such as an SA302 form or tax year overview, for the past two or three years.

• For contractors, evidence of upcoming contracts.

• For directors, evidence of dividend payments or retained profits.

• A written declaration if relatives are contributing towards a deposit.

Check and try to boost your credit rating

“Check that your credit rating is correct,” said Harris. “If you have debts, think about reducing them if possible as the lender will take these into consideration when deciding how much you can borrow.”

Ghasri said credit history was a “big part” of securing a mortgage. She recommended getting your name on the electoral register if not already, ensuring no credit cards are at their limit and paying off as much credit card debt as possible each month.

Have proof of earnings

Many self-employed workers face a challenge not only boosting their actual earnings, but also convincing lenders about the likely reliability of future earnings.

“Lenders have being applying more forensic underwriting to the self-employed by asking for sight of their past six months’ business bank account statements along with commentaries regarding their future trading and whether it is sustainable,” said Harris.

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Ghasri added: “Mortgage lenders will take your average profits into account before deciding whether to approve you for a mortgage, so if your earnings vary from high to low each year, you’ll need to provide further evidence to prove that you can guarantee future income, with proof of new clients, or contracts.

“It’s always good practice to retain as much profit as possible within your businesses, but paying yourself a higher dividend of profits can really help boost your mortgage application. Having as much money as possible to put into your deposit will only help increase your chances of securing a mortgage too.”

Consider using accountants, advisers and brokers

“Although many self-employed people do their own accounts, many lenders won’t consider mortgages for self-employed people whose accounts haven’t been signed off by an accountant,” noted Ghasri.

She recommends having accounts looked over by a certified or chartered accountant in advance. Those without several years’ accounts or with more complicated earnings histories should consider seeking the help of financial advisers and independent mortgage brokers, she added.

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“They can help clear up exactly how to get a mortgage when self-employed, and advise on the best lenders to approach to ensure your chances of getting a mortgage are strong.”

Seeking support means extra costs—though many brokers take a commission fee from lenders instead of charging—but Harris agreed brokers were key. “It is more important than ever that the self-employed seek advice.”

Hope for the best

Getting a mortgage may be “daunting” for the self-employed, Ghasri noted, but it is far from impossible.

“As long as you’re well prepared, hopefully things will go smoothly,” she said. “Just make sure your application is as bulletproof as can be, have your forms and deposit ready to go, and soon you’ll be in your dream home.”

Some in the property world suggest the obstacles are sometimes overstated. Emma Graham, business development director at Hodge Bank, told Yahoo Finance UK earlier this year: “Going back a generation ago it was quite tricky, some of the requirements were quite onerous, but self-employment is ever-growing and more popular.

“The challenges can come if you are newly self-employed and have a limited history of your accounts, but an adviser will know exactly where you should go to get the best deal.”

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