As a financial expert with over a decade of experience in accounting and mortgages, I’ve guided many self-employed individuals through the complex process of securing a mortgage. While being your own boss has its perks, it can present unique challenges when it comes to home financing. Let’s explore the key aspects of self-employed mortgages and strategies to improve your chances of approval.

Understanding Self-Employed Mortgages

Self-employed mortgages are essentially the same as standard mortgages, but the application process can be more complex due to the nature of self-employed income. Lenders typically consider you self-employed if:

• You own shares in a business that forms your main income
• You’re a contractor or freelancer
• You’re a director of a limited company
• You’re a partner in a partnership

The Challenges of Self-Employed Mortgages

1. Proving Income Stability: Lenders prefer steady, predictable incomes, which can be challenging for self-employed individuals with fluctuating earnings.
2. Limited Trading History: Most lenders require at least two years of accounts, which can be a hurdle for newly self-employed applicants.
3. Complex Income Structures: Business owners may have multiple income streams or retain profits in the company, making it harder to demonstrate personal income.
4. Stricter Lending Criteria: Some lenders have tightened their criteria for self-employed applicants, especially in the wake of economic uncertainties.

Improving Your Chances of Approval

1. Prepare Comprehensive Documentation: Gather at least two years of accounts, SA302 forms, and tax year overviews from HMRC.
2. Maintain a Healthy Credit Score: A strong credit history can offset some of the perceived risks associated with self-employment.
3. Save a Larger Deposit: A bigger down payment can improve your loan-to-value ratio and increase your chances of approval.
4. Work with a Specialist Broker: Some lenders are more accommodating to self-employed applicants, and a broker can help you find them.
5. Consider Retained Profits: Some lenders may take into account retained profits in your business when assessing affordability.

Types of Acceptable Income Evidence

• Certified accounts
• SA302 forms and tax year overviews
• Bank statements (typically 3-6 months)
• Contracts for upcoming work (for contractors)
• Business projections (in some cases)

Conclusion

While securing a mortgage as a self-employed individual can be more challenging, it’s far from impossible. The key is to be well-prepared, maintain meticulous financial records, and potentially work with a specialist broker who understands the nuances of self-employed mortgages.Remember, lenders are continually adapting their criteria, and some are becoming more flexible in their approach to self-employed applicants. By presenting a strong, well-documented application, you can significantly improve your chances of securing the mortgage you need to achieve your homeownership goals.

Frequently Asked Questions (FAQ)

Q1: How long do I need to be self-employed before I can apply for a mortgage?
A: Most lenders prefer at least two years of accounts, but some may consider applications with just one year of trading history.

Q2: Can I get a mortgage if I’ve only recently become self-employed?
A: It’s more challenging, but not impossible. Some lenders may consider your previous employment history or accept projections for future income.

Q3: How do lenders calculate my income if it varies year to year?
A: Many lenders take an average of your income over the past 2-3 years, but some may focus on your most recent year’s earnings.

Q4: Will my business structure affect my mortgage application?
A: Yes, different business structures (sole trader, limited company, partnership) may require different types of documentation and income assessment.

Q5: Can I use my company’s retained profits to boost my mortgage affordability?
A: Some lenders are now considering retained profits in addition to salary and dividends, which can potentially increase your borrowing power.