Getting a mortgage when you’re self-employed can be a bit more complex compared to traditional employment, but it’s definitely possible. Here’s a detailed overview of what you need to know:
1. Understanding Lenders’ Criteria
Lenders’ Perception: Self-employed individuals are often viewed as higher risk by lenders because their income can be less predictable. As a result, they typically have stricter requirements compared to employed applicants.
Income Verification: Instead of a steady salary, lenders will look at your income over time. They often require at least two years of self-employed income to get a clearer picture of your financial stability.
2. Documentation Required
Tax Returns: Most lenders will ask for your last two years of tax returns. This helps them verify your income and assess your financial stability.
Bank Statements: You’ll need to provide recent bank statements to show your current financial situation and how you manage your income.
Accounts: Certified accounts from an accountant may be required. These should detail your income and expenditures.
Business Plans: For those who have been self-employed for less than two years, a detailed business plan and projections might help demonstrate future income potential.
3. Types of Self-Employed Income
Sole Traders: Your income is usually your profit, so lenders will look at your net profit after expenses.
Limited Company Directors: Lenders may consider your salary and dividends, but how they assess this can vary. Some might focus on your salary alone, while others may consider a combination of salary and dividends.
Partnerships: Lenders will look at your share of the profits, which might require a breakdown of how profits are distributed among partners.
4. Improving Your Mortgage Application
Maintain Accurate Records: Keeping clear and accurate financial records makes it easier to prove your income.
Reduce Debt: Lowering existing debt can improve your debt-to-income ratio, which is an important factor for lenders.
Increase Your Deposit: A larger deposit can reduce the risk for lenders and may improve your chances of approval.
Consider a Specialist Broker: A mortgage broker who specializes in self-employed mortgages can help you find lenders who are more flexible with their criteria.
5. Mortgage Options
Standard Mortgages: These follow the same terms as for employed individuals, but with stricter proof of income requirements.
Self-Employed Mortgages: Some lenders offer products specifically designed for self-employed individuals, with criteria tailored to their unique situations.
Buy-to-Let Mortgages: If you’re looking to invest in property, buy-to-let mortgages are available, but they typically require a higher deposit and can have stricter affordability criteria.
6. Conclusion
While securing a mortgage as a self-employed individual can be more challenging, it’s far from impossible. By maintaining thorough records, being prepared with the right documentation, and possibly working with a specialist broker, you can improve your chances of obtaining a mortgage that meets your needs.