If you’re self-employed in 2023 there are a few more hoops to jump through when applying for a mortgage compared to an employed individual. But that’s not necessarily a bad thing! Being self-employed opens the door for further flexibility and with the correct planning you can achieve your objectives through a number of different routes that aren’t available to those employed.
Is it hard to get mortgage if self-employed?
So, does this mean it’s harder to get a mortgage if you’re self-employed? The short answer is that it depends. Organising a self-employed mortgage can be as difficult or easy as you make it and that’s because it depends purely on the preparation done by the client (you!) and the balancing of your financial background (what you’re looking for in terms of pricing and leverage). A good starting point before considering putting in a mortgage application would be to understand your own circumstances:
- How many years accounts/SA302s or Tax Calculations are available?
- What salary + dividends do you take out of the business?
- What net profit is left in the business? What percentage of net profit are you entitled to?
- How big is your deposit? (if applicable)
- How many financial dependents do you have?
- How healthy is your credit?
- For contractors – when does your existing contract end? Are you paid via an umbrella company?
Having a good understanding of all these points before starting any process will go a long way to identifying what is achievable in your personal situation and help line up expectations. How banks assess these touch points differ from bank to bank but don’t worry too much about this right now – we’ll get into that in more detail later on in the article.
How to get a mortgage if you’re self-employed: The Process
So, onto the process! To get a mortgage, you’ll need to follow the following steps:
- Identify a property and have an offer accepted (if applicable).
- Submit a mortgage application.
- Valuation.
- Offer
- Legals
- Completion! 😊
Of course, this breakdown is fairly simplistic and there are several nuances at each stage. But for the scope of this article, we’ll be focusing predominantly on Stage 2 (applying for the mortgage) which is where a majority of mortgages tend to fall through.
To best position yourself and your broker with the necessary tools and to ensure you get the best deal, you will need a firm understanding of the following:
- Basic requirements for the mortgage application
- How much can I borrow? Income multiples.
- Basic documentation requirements & acceptable proof of earnings
So, let’s run through each of these in turn.
Basic requirements for the mortgage application
Now that you have decided to get a mortgage you will need to do some personal admin. Your broker will request a number of documents to understand your financial position and to run meaningful research. This can include:
- ID documentation (passports/proof of address)
- Bank statements (business & personal)
- Tax returns (SA302s/Tax Year Overviews)
- Full business accounts
- Budget planner/fact find (breakdown of spending habits)
- Credit report (to include outstanding loans/ hire purchases etc.)
How much can I borrow? Income multiples
Ok great, at this point you’ve collated your documentation and confirmed your personal finances, but how does this translate to how much banks are willing to lend? The predominant driving force (though not exclusive) is your income. All banks will have their own affordability matrixes to determine how much they would be willing to lend you subject to underwriting and valuation. So, how much can you expect to borrow?
“How many times my salary can I borrow for a mortgage self-employed?”
If you are looking for 75% or less loan to value (LTV) then as a rule of thumb banks will take your average annual income and multiply this by x 5 of what they deem acceptable income. For example this could be the average of your last 2 years income. If you are looking to borrow beyond 80% LTV income multiples can decrease to x 4.49 of acceptable income.
Again, this is a crude calculation, some banks can have more favourable/restrictive multiples – it all just depends on the circumstances.
It’s worth noting this calculation does not account for your personal situations such as personal spending, credit backgrounds, dependents etc. However, it’s still a good starting point to build a picture of what’s possible.
Looking to draw a Dividend? Good news! Salary/dividend drawings & net profit are also acceptable forms of income, your broker will just need to see:
- Full accounts
- Last 2 years’ tax calculations (SA302s)
- Last 2 years’ tax year overviews
- Accountant certificate may be considered
After you’ve calculated how much you can borrow and filled out the relevant documentation, you’re now in a good position for your broker to submit your mortgage application and Step 2 is complete!
In the following weeks, your broker will walk you through the rest of the steps including instructing the valuation, underwriting and navigating legals until completion!
Q&A
Now that we’ve run through the general process of submitting a mortgage application, it’s now time to answer some of your specific questions.
How many payslips do I need for a mortgage self-employed?
If you are paying yourself a salary and are on PAYE, you will need at least 3 months’ payslips and latest years P60. Accounts may still be requested depending on the shareholding split of the business.
What is proof of income for self-employed UK?
SA302s/ Tax calculations with the corresponding Tax Year Overviews; Full Accounts; accountant certificates in some cases can be used.
How many years do you have to be self-employed to get a mortgage?
- Generally speaking, banks will request 2-3 years of income proof if you are self-employed. Therefore, you will need to be self-employed for at least 2 years to maximise your options. However, if you have only been self-employed for 1 year it is not the end of the world as some banks/specialist lenders can consider just 1 year’s accounts if this is all that is available subject to underwriter review.
What proof of earnings do I need for a mortgage self-employed?
- For most self-employed individuals banks will accept 2-3 years SA302s and Tax Year Overviews as proof of income. For Ltd company directors some banks can consider either:
- Salary + dividends
- Share of net profit + salary
In most cases lenders will look to average the last 2-3 years of acceptable income and use this for their affordability calculations. However, there are some specialist banks can consider just latest years income only for their affordability.
How to get a mortgage if you’re self-employed: Final Word
Hopefully, this article has served as a good starting point as you start to develop an idea of what’s possible and what’s required to unlock the most competitive deals on the market.
As financial brokers ourselves, we are experts in navigating the field of mortgages and know the struggle it can be as a self-employed individual, trying to get a mortgage for the first time. Our team is on call to help you with all your queries and get you where you need to be so don’t hesitate to reach out and give us a call. Otherwise, if you have a specific enquiry you’d like to make, please use the form below and we’d be delighted to set up a FREE consultation for you.