Running your own business can mean that your money doesn’t quite fit into the same boxes as someone earning a regular monthly salary.
This doesn’t mean that getting a mortgage is out of reach.
Self-employed buyers apply for mortgages every day. The main difference is usually in how income is proven and assessed, with lenders looking at your trading history and financial situation to understand how sustainable your earnings are.
If you’re hoping to buy a home, here are some basic things you should be aware of before starting your application.
What does “self-employed” mean to a mortgage lender?
There is no single definition that every lender uses.
Sole traders and business partners are usually treated as self-employed, while limited company directors may be assessed differently depending on their contribution and how they generate income from the business. Contractors and the self-employed can also fall within the lending criteria for the self-employed, although some lenders have specific ways of assessing contract income.
This is important because the way your earnings are calculated can vary depending on how your business is structured.
Get your income proof ready
For a working applicant, proving income may be relatively simple, as payslips and P60s provide much of the information the lender needs. If you’re self-employed, lenders will usually need a broader picture.
Depending on your circumstances and the lender, you may be asked to provide documents including:
- SA302 Tax Accounts
- Tax year overview
- Final accounts or approved by accountants
- Personal banking data
- Business bank statements
- Proof of your deposit
- Identification and address proof
Many lenders will want to see a trading history covering more than one year, although the amount of evidence required varies. Some lenders may consider applicants with a shorter business history, while others may want numbers for two or more years.
Getting these documents together ahead of time can make it easier for you to understand which lenders and mortgage options may suit your circumstances.
How will the lender calculate your income?
This is one area where standards can vary significantly. A Sole trader They can be valued using the profits shown in their accounts or tax accounts, often across recent trading years.
to Director of a limited companythe lender may consider salary and earnings. Some lenders may also take into account other elements of a company’s financial position, depending on their individual criteria.
If you are Contractor or freelancerYour current contract, previous work history and evidence of continued earnings may form part of the evaluation. Some lenders may also use the contract or today’s rate when calculating income.
The important thing to remember is that two lenders may look at the same self-employment income differently. That’s why the number shown on your most recent tax return doesn’t necessarily tell you, in and of itself, how much you can borrow.
What if your income changes from year to year?
Income fluctuation is normal for many freelancers, and lenders recognize that businesses don’t always produce exactly the same numbers every year.
However, they will want to understand the pattern.
When earnings remain flat or increase, valuation may be clearer. If the latest numbers are lower than previous years, the lender may look closely at the reasons for the change and can base affordability on the lower number. Seasonal income, changes in trading conditions or investing back into the business can affect the numbers, which is why the wider context can be important.
Your broader finances are also important
Being self-employed is only one part of your mortgage application.
Lenders will also take into account your affordability and overall financial obligations, just as they would for a working applicant. This can include your current borrowing, regular expenses, the size of your deposit and your credit history.
Checking your credit report before applying can be helpful. It gives you the opportunity to ensure the information recorded about you is accurate and to identify anything you may need to understand before the lender carries out its checks.
It is also helpful to avoid assumptions about what you will or will not be qualified for based solely on your employment status.
Planning ahead can make a difference
If buying a home is on your radar, it may be worth considering your mortgage situation before finding the property you want.
Having your most up-to-date accounts, tax documents and bank statements can give a mortgage advisor a clearer picture of your circumstances and help identify lenders whose criteria suit the way you earn your income.
For limited company directors in particular, it may also be useful to speak to both your accountant and mortgage advisor before making important financial decisions within the company, as tax planning and mortgage affordability are not always evaluated in the same way.
Just because you’re self-employed doesn’t mean you’re excluded
Having a less traditional income structure does not automatically mean having fewer mortgage options.
Lenders take different approaches to self-employed applicants, including company directors, contractors and the self-employed, so the right fit can depend on how you structure your income and the evidence available to support it.
The team is in Embrace financial services Supporting hundreds of self-employed buyers across a wide range of circumstances, helping them understand how different lenders assess their income and what they may need to prepare before applying.
If you’re planning to buy, seeking advice early can give you a clearer picture of your options before you start making offers on properties.
Talk to an advisor to explore your options
This article is for information purposes only and does not constitute personal financial or tax advice. Mortgage standards, documentation requirements and income assessment methods vary between lenders and individual requirements should always be confirmed.
