Understanding mortgage eligibility for self-employed individuals

It’s suggested that over 40% of people in the UK who’ve been declined a mortgage feel it’s embarrassing, and that somehow they’re a failure. At Crunch Mortgages, we’d suggest that if there’s a “failure” here then it’s likely to do with the advice they’ve been given, rather than simply the actions they’ve taken.

The same industry research shows that people are avoiding pursuing their dream of getting on the property ladder because of outdated myths about what it takes to get approved for a mortgage.

Around 35% assume they’re not eligible or don’t earn enough, and 33% are finding the process and advice confusing and stressful. It’s fair to presume that a huge number of people who could potentially own property are discounting themselves without even trying.

As of July 2024, there were around 4.24 million self-employed people in the UK. Many of whom mistakenly think that their irregular income or lack of three years’ worth of accounts means they automatically don’t meet the requirements for a mortgage. This is incorrect.

This article covers:

• What are the basic requirements for a mortgage?
• What self-employed people can do to improve their mortgage chances
• What documents do I need to apply for a mortgage?
• Earnings and affordability
• Common problems with self-employed mortgages
• Crunch Mortgages can help

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What are the basic requirements for a mortgage if you’re self-employed?

The majority of the information needed for a successful application is contained within your financial accounts and your credit report, both of which are instantly available to brokers with your permission.

In general terms, anyone applying for a mortgage will be expected to be able to prove their identity, address history, the source of deposit and also to supply bank statements if requested. Get off to a good start by ensuring you have your finances in order, starting with the deposit. The vast majority of lenders will ask for 5% of the total home price up-front. For example, if your dream pile costs £500,000 lenders will be asking for a deposit of £25,000. This would mean you’ll be taking out a mortgage in the region of £475,000 plus interest.

Beyond this, what you need to prove will vary based on your business structure. We’ve outlined the requirements for self-employed individuals according to different business structures.

Sole trader

• Minimum of one year’s finalised accounts or SA302 from HMRC less than 18 months old.
• Lenders will work on the sole trader’s net profit.

Partnerships

• Minimum of one year’s finalised accounts or SA302 from HMRC less than 18 months old.
• Lenders will work on a partner's share of the partnership’s net profit.

Limited company

• Income calculated on either salary or dividends, or salary and shared profit.
• Most lenders will average the last two years' income.

Contractors/freelancers

• Current daily rate annualised over the year. Ideally, a 12 month track record is needed but it’s possible to secure a mortgage on the first contract providing experience in the industry can be shown (this can include working in an employed role).
• Lenders usually like to see at least four weeks left on the contract and ideally no more than a four week gap between contracts. However, some lenders can be more flexible and consider up to 12 weeks in gaps in a 12 month period.

Umbrella services and CIS

• Ideally, 12 months of payslips are needed, although a lender may consider with only three months of experience in the industry shown.

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What self-employed people can do to improve their mortgage chances

Lenders don’t just look at the numbers when approving a mortgage – there are several other factors that also influence their decision.

So we've put together some expert tips to help you stand the best possible chance as a self-employed worker:

• Speak to a broker first - Not all lenders have the same criteria – a broker will ensure you are matched with the most suitable lender
• Check your credit file - Ensure there aren’t any adverse entries against you, especially ones you’re not aware of
• Ensure you’re on the electoral roll - Check with your local council, this will help with the credit score
• Make sure your accounts are all up to date - To achieve the most competitive rates you need to have an impeccable credit record, so make sure everything is paid on time. It’s good practice to put everything on direct debit
• Stay away from payday loans - Payday loans do not paint a good picture of your finances, and lenders will often read this as you being in financial difficulty. Many lenders will simply decline to lend if there is a recent record of payday loans
• Minimise credit checks for other insurance or credit applications - Multiples credit checks in a short space of time can reduce your overall credit score. Be aware if using comparison sites for insurance they will run multiple checks
• Don’t allow your credit card to reach its limit - The higher the % usage of your credit card will result in a lower credit score. We’d suggest spreading outstanding balances across two cards, rather than having one on the limit
• Don’t make just minimum payments - Again, making just the minimum payments can suggest to the lender that you could be in financial difficulty. It’s also worth considering this because unless you’re on an interest-free card, the minimum payments will never end up paying down the debt
• Sort your deposit early - Preparation is key, especially if family members are gifting you funds towards your deposit
• If using business funds, speak to your accountant - Taking regular withdrawals can lead to a smoother underwriting rather than taking a large lump sum in one go. When taking a large lump sum the lender may ask the accountant to confirm this will not be detrimental to the business, causing an extra delay in the process
• Get your documents in order - See our documents checklist below
• Get yourself an agreement in principle - Most estate agents won’t let you view the property, let alone make an offer without an agreement in principle. This will confirm the maximum loan to give you peace of mind that you are looking at properties within your budget. It’s also a good indication that your credit is in order.

What documents do I need to apply for a mortgage?

Here’s a definitive list of what mortgage lenders will ask for if you’re self-employed:

• ID - Make sure you have a valid photographic ID. If you present your driving licence, make sure it has your current address on it
• Proof of Address - A council tax, utility bill or financial statement will suffice. If everything is online, you should change one of your accounts to postal statements
• Employer - You’ll need to gather three to six months’ payslips and P60s. If you’ve received extra income such as bonuses or commission, some lenders may require two years worth of P60s
• Limited company accounts - If you’re a limited company director then the last two years’ worth of fully signed accounts is required in most cases, though some lenders will accept just one year's accounts. The latest accounts cannot usually be over 18 months old, so try to finalise the latest year’s as soon as possible
• Personal Tax Returns - Self-employed workers need to request three years’ SA302s and a tax overview from HMRC, some lenders will accept as little as one year’s SA302, but three years’ will give you the full range of lenders and deals
• Contractors - You’ll need the last 12 months of contracts, fully signed by all parties. These need to clearly show your day-rate and have been paid in sterling, with an expiry date ideally included on each contract. Obviously, not all contracts have an end date, some go day-to-day, so rolling contracts can be accepted
• CIS or Umbrella - Six months’ worth of payslips are required
• Bank Statements - These can include postal or downloaded versions of the last three months’ salary fed bank statements, three months business bank statements and three months bank statements showing rental
• Deposit - You need to provide a statement showing funds held, and a build-up of funds. If funds are a gift from a family member, you need a statement letter from them confirming they have funds or that they have been transferred to you
• Background buy-to-lets - If you have buy-to-let properties as a source of income then a Tenancy Agreement and three months bank statements to evidence rent will be needed
• Life insurance or other protection - Lenders will usually need to see evidence of any Life insurance you have in place to cover the mortgage. This usually means they just need to see a copy of the policy summary.

Earnings and affordability

A big question on sole traders’ and freelancers’ lips when applying for a mortgage is ‘how do lenders calculate my earnings?’ Once you’ve proved you earn enough to be approved for a mortgage you still need to establish an estimate of your income, to determine how big your mortgage can be. While you may want to maximise the amount you can borrow, it's in everyone’s interest that you don’t take on a mortgage you can’t afford.

The difficulty with being self-employed is that many things can distort what your true income might actually be. Just a few factors to consider may be that:

• You may receive income through sources other than just a basic salary
• You may have good and bad months of business
• You may reinvest some profits back into the company
• You may be using legal tax loopholes to reduce your visible profits

All of these factors will affect how your true income will appear to a lender.

The most common way a lender will analyse earnings is by looking at the net profit of your business – whether you’re a sole trader or freelancer. If you’re set up as a limited company, a lender will look at your salary and dividends, or share of net profit. For contractors, your annualised day rate will be taken into consideration.

The amount you can borrow is often determined by an ‘affordability calculator’. Our mortgage calculator will give you an idea of how much you can borrow, but to get a personalised calculation it’s always best to speak to one of our expert advisors. Lenders will look at all sorts when deciding whether or not to give you a loan, including lifestyle spending, commitments, and dependants.

What mortgage types are available to someone self employed?

As well as high-street lenders, there are also some specialist lenders who offer products tailored just to the self-employed. The main types of repayment methods available include fixed rate, tracker, full repayment and interest-only.

Below we've expanded on the details of each repayment method available when sourcing a mortgage.

Fixed rate

• The interest rate remains the same through the duration of the fixed period.
• Typically between one and five years in length.
• You may be charged a penalty if you want to end the mortgage before the end of the fixed term.
• A fixed rate gives you stability in your finances as the mortgage payment doesn't change during the fixed period. If there is a rise in interest rates your repayments will remain the same.
• If interest rates fall however then you would not benefit from any reduction.

Tracker

• Interest rate is linked to the Bank of England base rate and as such rises and falls instantly as the rate changes.
• Total rate is the base rate plus a fixed amount, an example would be the current base of 0.25%, plus a fixed 1.5% making a total rate of 1.75%.
• Typically the Tracker is in place for two to five years.
• You’ll usually be charged a penalty if you want to end the mortgage before the fixed term.
• Generally this gives you lower rates than fixed rate mortgages and you would benefit from a drop in the bank base rate.
• If interest rates rise then your payments would rise. Therefore you must consider affordability at an increased rate before you take on a Tracker mortgage.

Full Repayment

• Your monthly repayments consist of what you owe in interest and a repayment of the capital. At the end of the mortgage term you will have repaid the mortgage in full.

Interest-only

• Your monthly repayments consist of interest payments only and no capital repayments.
• At the end of the term, you still owe the lender the full amount of the original mortgage. This is suitable for clients that have other assets to cover the interest only balance, for example those with other property, pensions, investments, future bonus payments or downsizing where sufficient equity in property exists.
• During the term you can change to a full capital & interest repayment mortgage to start reducing the capital owed.

There are other ways of repaying a mortgage, such as discounted rates and offset mortgages, however the above are the main products you should understand before looking into your own options.

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How can I make the best possible case?

Lenders don’t just look at the numbers when approving a mortgage - there are several other factors that also influence their decision.

You’ll stand the best possible chance if you follow these tips:

• Make sure your accounts are all up to date.
•  If you can, produce Self Assessment tax returns (form SA302) as a proof of income, rather than standard accounts
• If you have a limited company, reinvesting too much of your company profits may make it look like you’re not earning very much, restricting the amount you can borrow
• Switching legal setup - i.e. from sole trader to limited company - prior to applying for a mortgage could hinder your application
• Ensure you are on the electoral roll
• Ensure all of your accounts are paid with Direct Debit
• Don’t allow your credit card to reach limit or make just minimum payments

As well as the big banks, you should also try going to a smaller bank, building society, or specialist self-employed mortgagors. The best way to maximise your choices is to employ a specialist self-employed mortgage broker who has extensive knowledge of the industry and can help match you with the right lenders.

Common problems with self-employed mortgages

The most common problem for a self-employed person applying for a mortgage is only having one year of accounts. Most lenders require two or three years. A big increase in your income can also prove problematic. Lenders will often average out the last two or three years. However, we have access to a wide range of lenders so if you only have one year’s accounts or have seen a big increase in the latest years we have a lender to help.

What if I get refused?

If you get refused the first thing to do is find out why you were refused, if you have not consulted an independent mortgage adviser it is probable that you have approached the wrong lender for your circumstances or do not qualify for a mortgage in your current situation.

By talking to an independent mortgage adviser you will know why you have been refused and be told what you need to do to overcome this.

Crunch Mortgages can help

One of the biggest challenges facing prospective self-employed mortgagees today is that lenders often require extensive proof of a borrower’s income before issuing any mortgage at all. Those working for someone else would usually just submit their PAYE pay slips, but the self-employed do not have these, which makes it harder to produce accurate records.

On top of this, the self-employed often operate through a limited company, balancing their income for tax efficiency between paying themselves a salary and company dividends. This makes it difficult to prove enough money is being earnt to justify the mortgage.

As self-employed couple Steve and Karen discovered, the secret to getting a mortgage is simply to speak to a broker who specialises in mortgages for the self-employed and contractors – this is exactly what we do!

Crunch mortgages is a different kind of mortgage broker. We understand contractors and the self-employed better than anyone and we make sure that if you’re eligible for a mortgage, then we’ll find the best one for you – and if you’re not ready yet, then we’ll help you get there.

As open market brokers we will cover every option for you. We also work hard with our specialist self-employed lenders to secure exclusive deals that are only available to us at Crunch Mortgages; we will always include these in our discussions with you where we are able.

Failure is not an option as far as we’re concerned! Give us a call today and find out what you can actually achieve.

Need more advice?

Our team of experts can help. Head over to Crunch Mortgages for more information.