Applying for a mortgage while self-employed

Before the Credit Crunch in 2008, many lenders had little interest in seeing documented evidence of income for the self-employed. The so-called “self-certification” mortgages often involved the self-employed applicant telling the lender how much they earned, and the lender simply taking them at their word. Unfortunately this process proved unreliable, and lenders were forced to reassess their criteria requirements in the wake of the subsequent financial crisis.

Since then self-employed professionals have often struggled to overcome additional layers of challenge and complexity in their mortgage applications when compared to their employed counterparts. A company employee can often evidence their income with nothing more than a current payslip, whereas an equivalent self-employed applicant may have to provide audited accounts and company bank statements covering several trading years. These are then scrutinised in terms of turn over, operating costs, and sustainability of net profit. If the required income is not consistently demonstrable over a long enough time period then the Underwriter’s decision could be a reduced maximum loan at best, and an outright refusal to lend at worst.

These well-publicised complexities in arranging mortgages, however, have not deterred large swathes of the population from becoming their own boss. In fact the number of self-employed professionals has been growing steadily over the last few years. The sheer magnitude of this demographic now makes it something lenders can no longer ignore.

It is still true that taking out a mortgage when you’re self-employed involves more paperwork than if you’re a PAYE employed professional with a monthly salary, but whether you’re a Sole Trader, a partner in a business, or the Director of a limited company, the truth is that obtaining a mortgage needn’t be that challenging anymore. Below we consider the minimum lender requirements depending on the type of self-employed applicant:

Sole Trader

Running a business as an individual makes keeping organised records and accounts relatively straightforward, especially as you’re the one retaining all the profits. If you do your tax by self-assessment and have HMRC calculate it for you, you may be asked to download documents called your “Tax Calculation” and “Tax Overview” via your HMRC online account. These show the total income you’ve received from all sources and the total amount of tax due. Lenders may also require three years’ worth of accounts, so make sure you have everything ready when you start applying for a mortgage. Using a Chartered or Certified Accountant can help with some lenders, and you should also be aware that your maximum permitted borrowing is likely to be based on an average of your net profit over the years.

Partnership

Not all of the self-employed population are Sole Traders, and many in fact set up their business in partnership with one or more other parties. In this scenario lenders look at the applicant’s individual share of the total when assessing how much they are willing to lend. The prudent mortgage applicant should ensure they can provide accounts that clearly show their share of company profits before making their application. When in doubt, Underwriters will often also accept a letter from the company Financial Director explaining the division of profits between the business partners.

Contractor

Contractors typically need to provide lenders with a track record of their past work alongside further evidence of anticipated future work. For those who have been contracting for less than one year this can cause complications, however there are lenders in the market that can accept this providing there is a track record of prior work in the same industry or role. For example, a lender will still often take your application into consideration even if you left full-time employment to begin work as a contractor within the last year. This is, however, far more likely to be the case where there is also evidence of anticipated future work. This will often be demonstrated via the current fixed term contract, especially if it has already been renewed at least once before.

Limited Company Director

Many people choose to set up limited companies which serve to keep the business separate from personal finances. Every limited company must have at least one Director at the helm, and in some cases also a Company Secretary. Directors often pay themselves a nominal salary and then top this up with significant dividend payments from their company shareholding. Lenders are typically comfortable with this arrangement and make their assessment using an average income from the two combined sources.

Issues can arise whereby companies don’t pay all their profit out as dividend income but rather retain some of the profit within the company. Although some lenders will consider retained profits when they assess an application from a Director of a limited company, many will not. This might mean an otherwise affordable mortgage becomes unattainable, simply because profit has not been distributed.

Lenders these days have a duty to assess whether a mortgage is affordable for the borrower, and as such the current set of criteria is unlikely to disappear anytime soon. But with the right evidence of income in hand, a self-employed applicant can meet the requirements of many lenders without too much difficulty.