Buying a house when self-employed
When you’re self-employed, buying a house is different. You’re your own financial boss, responsible for paying your own tax and keeping your own records. Instead of a fixed salary paid by an employer like clockwork, your income is maybe flexible, different each month. Lenders will ask you for specific kinds of evidence to reassure them you’re capable of paying the loan back. So, this is our guide to buying a house when you’re self-employed. By the end you’ll be able to kick-start the home buying process with confidence and you’ll know exactly what a mortgage provider will need from you. Can I buy a house when self -employed? Yes, you certainly can. Here’s how.
How to Buy a House When Self-Employed
It’s a popular question. How to buy a house if you are self -employed? You’ll save yourself time and hassle if you’re well prepared, so everything goes smoothly without frustrating delays and misunderstandings. If you’ve bought before when employed by a company, the process will feel a bit different with extra checks, proof and assessments to handle. If this is your first time buying, this is what you need to get ready.
First, it’s important to know lenders have specific criteria to determine whether you are in fact self-employed, and they can differ between lenders. Take Barclays. They’ll consider you self-employed if you have more than a 20% share of the business where you get your main income. You could be a sole trader, a partner, director or contractor with their own limited company. As long as you own more than 20% of it, you count as self employed. You can also classify as self-employed when you own shares in a business where you get your main income, are a contractor or freelancer, are acting as a director of a limited company – or a partner in a partnership or limited company.
Next, bear in mind mortgage lenders will usually want to see proof of your income for the past two complete tax years. If you’ve been self-employed for less than two years, with only one year’s accounts, you might still be able to get a mortgage. It’s possible for companies trading for a year, sole traders self-employed for one year, for self-employed buy to let mortgages, and businesses whose company structure has recently changed. And you might be able to get a mortgage as a contractor or freelancer with a year’s accounts.
If you’re self-employed and want to buy a property with a mortgage, be prepared to provide all the documentation your lender needs to see. Ask them for a list early in the process to give you time to gather it together. If you can get an Agreement in Principle from your mortgage lender to confirm you’ll be able to borrow the right amount of money, it’ll be helpful.
So how, exactly, do you get a mortgage when self employed? We’ll look at that next.
How to Get a Mortgage when Self-Employed
There are 3 key stages to the self employed mortgage application process. First they gather and verify all the information they need about you and your finances. Then, assuming they’re happy, they’ll agree to an ‘Agreement in Principle’. Then you decide the mortgage you want, and apply formally for it.
The information lenders need usually includes proof of your income for the last 2-3 years, and bank statements going back the same amount of time. They’ll need to see the details of any loans and debts you’re paying back. The details behind your business’s net profits might come under scrutiny, and the documentation and accounts you provide as evidence have to be verified by a qualified bookkeeper or accountant.
A lender might ask for the declarations of earnings you’ve submitted to HMRC, along with tax year overviews and the details of salary and dividend payments. They’ll probably ask for evidence of upcoming work, regular work, and one-off contracts. And you’ll have to officially verify your identification with a passport, driving licence or Council Tax bill. Last but not least, lenders carry out a credit score assessment on self-employed mortgage applicants.
As a self-employed applicant the amount you can borrow varies, but you can expect as much as 95% of the property value. Lenders are happy to lend from 3.5 to 4.5 times the salary you take from your business. The difference is lenders tend to assess average income over a 2 or 3 year period to figure out how much you can borrow.
How to Maximise a Self-Employed Mortgage
For some of the bigger mortgage lenders, self employment comes with assumptions. For example, self-employed professionals like solicitors and doctors are considered to be extremely secure, which means they can sometimes borrow as much as six times their income. Most lenders don’t have strict criteria but they’ll treat you as an individual, using their own guidelines to assess each case on its own merits.
As someone self-employed buying a house you’ll want to know how to maximise your chances of getting a self-employed mortgage. The bigger deposit you can save, the better, simply because it gives lenders confidence you’re a financially sound risk to take. Some lenders automatically ask for a 15% deposit from self-employed people, others vary it depending on your situation.
Can you maybe offer other assets as security for the loan, maybe property or valuables? An expensive car can help you out, proving you have the spare income needed to weather potential storms. Family offset mortgages can come in handy as well. If your parents own their own property, it can potentially be used as security.
Check your credit rating before you start looking for loans. You never know, there might be something you can do to improve your score before applying. Your lender will assess it, so it’s worth making certain the information on your record is accurate. Also, make sure you’re on the Electoral Register.
There’s more you can do around how to buy a house if self-employed, way before actually talking to lenders. At least 6 months before applying for a mortgage, detox your finances and rationalise your spending. Cancel or close unused subscriptions online and offline. Stay away from online gambling. Pay off your credit cards and loans, and minimise your business expenses.
Lastly, a really good tip: Speak to a reputable mortgage adviser who deals in all the products on the market, or one dealing in products from a suite of trusted lenders. And take a look yourself to double check, approaching a collection of potential lenders to get a clear picture of what’s out there.
That’s it. The answer to the all-important question: can you get a mortgage if self-employed is a yes. To make it easier on yourself, prepare your finances first, gather all the proof and information lenders will ask for, talk to a good IFA, and do your research. Then you’ll be confident about the mortgage finding process.
Can we help you with buying a house when self-employed? We have some amazing places on offer, along with essential advice and support from people who know their stuff.