Almas Uddin
Founder and Mortgage Advisor
20 Dec 2023
Self-Employed Mortgages - The Revolution Guide
Are you self-employed, and imagine that it will be more challenging to get a mortgage than if you were in traditional employment?
The business finance broker team is happy to report that this isn't always the case, and there are plenty of mortgage options out there for self-employed professionals.
It is correct to assume that mainstream lenders often prefer the simplicity of calculating the income of employed applicants. Still, by working with a specialist whole-of-market broker, you have every opportunity to secure attractive mortgage rates.
The key is to ensure you understand how lender eligibility assessments work, and put together an application to a mortgage provider whose self-employed products match well with your circumstances.
Revolution Finance works with competitive lenders, who cater to:
- Contractors
- Freelancers
- Business owners
- Self-employed professionals
Our team is on hand to offer advice every step of the way and negotiate the best rates on the market. For more information and support, contact us on 0330 304 3040 or drop us a message at [email protected].
How is a Self-Employed Mortgage Different From a Standard Home Loan?
Self-employed mortgages are pretty much the same as any other mortgage.
However, the calculations for your income differ, as a lender will need to consider your type of employment and an income that is very likely variable.
While many high street lenders will offer self-employed mortgages, this is usually not their primary product. We find that specialist mortgage providers can offer exceptionally competitive rates, mainly when self-employed mortgages are their core type of lending.
How do self-employed mortgages work?
The difference is that a lender will assess your income on an alternative basis.
Unlike an employed applicant, your income might be less stable or might fluctuate considerably. Therefore, a lender will usually work on an average of your earnings over the last two or three years.
This calculation is different with every lender; some lenders are less flexible and might cap the maximum they can lend on a strict basis.
They'll also include different aspects of your pay - so the average annual income you make as a self-employed business might include different income streams. Some lenders will include 100% of all income, and others will be selective about which earnings they consider applicable for a mortgage income assessment.
However, working with a whole-of-market broker such as Revolution Finance ensures that you only apply to lenders who offer excellent mortgage rates.
What Are the Eligibility Criteria for Self-Employed Mortgages?
Every lender works differently, but they will have similarities in the factors they consider:
- Income - all mortgage providers will need to know how much you earn. Some will require a minimum of two or three years worth of accounts, whereas more niche lenders can consider self-employed applicants who have been in business for less than a year.
- Deposit - the size of the deposit is usually similar to a typical employment mortgage. The standard is around 10%. If your application is considered a higher risk, such as trading for a shorter period, a lender might ask for a higher deposit. There are also options such as using Help to Buy if you have a smaller deposit.
- Credit rating - lenders will look at your credit score and/or your credit history to evaluate your application. If you have bad credit, you will undoubtedly have a lower number of lenders to apply to. On the plus side, working with a specialist broker means knowing who those lenders are and working with providers who offer niche bad credit mortgages for self-employed people.
- Age restrictions - some lenders have a maximum applicant age they will consider. Usually, this is around age 75, and sometimes up to age 85. Other lenders have no age limit and are more concerned with affordability.
How Many Years of Self-Employment History Do I Need to Get a Mortgage?
Typically, lenders will be most comfortable seeing two or three years worth of accounts to demonstrate your trading history.
However, some of the lenders that Revolution Brokers work with can consider an application after only nine to twelve months of trading.
In that case, they will seek evidence about the security of the business and look at contracts and other factors to ensure the income is sustainable.
How Does Getting a Mortgage When Self-Employed Work if I Can't Prove My Income?
Unfortunately not - reputable mortgage lenders have strict criteria for demonstrating ethical lending. Therefore, they cannot offer to lend to a self-employed person who cannot prove how much they earn.
In most cases, you will need to show your lender accounts for at least the last nine to twelve months.
The longer you have been trading and the more trading history you can provide, the more lenders you have to choose between and the better rates you will get.
If you cannot provide sets of accounts, you might be able to apply for a second charge mortgage. This option only applies to applicants who have a mortgaged property and wish to take out a second mortgage to release the equity owned.
Contact the Revolution team if you struggle to demonstrate your income as a self-employed person and find it challenging to secure a mortgage.
Can a Self-Employed Mortgage Broker Help Me Get a Bad Credit Mortgage?
You can, although with a bad credit history, it is less straightforward. However, by working with an experienced broker, you receive advice about which lenders are worth applying to, which cannot accept bad credit applications, and where you will be offered the best rates.
Revolution works with several bad credit specialist lenders, who have a more flexible approach to assessing self-employed applications.
Usually, the decision is based on other factors such as:
- Your age
- How severe your credit issues are
- Why and when the problems occurred
It can be possible, in some circumstances, to secure a self-employed mortgage even if you have had several adverse credit issues.
Provided some time has passed since more severe issues - such as bankruptcies and repossessions - and you can demonstrate good financial responsibility since a broker can negotiate a competitive deal on your behalf.
We also support clients with reducing their risk profile and mitigating issues presented by their credit history. For example, if you can increase your deposit value and produce at least three years worth of accounts, you have more options when it comes to self-employed bad credit mortgages.
Which Is the Best Bank for Self-Employed Mortgages Without a Long Trading History?
It all depends on how long you have been trading for and how closely you fit the other lending criteria.
Usually, it would be best if you waited until you have been trading for at least nine to twelve months. In that case, you'll still have fewer lenders to choose between - if you have been trading for two to three years, you will often receive much better rates.
If you are newly self-employed but have a previous history of work in the same industry, this can help strengthen your application.
Getting a Mortgage When Self-Employed: How Much Can I Borrow?
Most lenders will look at your average earnings and use this to calculate the maximum they can offer to lend.
Mainstream providers will usually ask for three years worth of accounts to calculate this average. Other more flexible lenders will look at the last two years, and fewer niche providers will look at the last nine to twelve months of trading.
Will a Self-Employed Mortgage Broker Increase the Maximum I Can Borrow?
Lenders can vary significantly in the calculations they use:
- Most multiple your average annual earnings by 4.5 times.
- Some can lend up to five times your annual income.
- Others will lend up to six times your earnings in specific situations.
As an illustration: if you have been a freelancer for three years, with accounts for each, earning an average of £30,000 per annum:
- Most self-employed lenders will lend up to £135,000.
- Some will offer you up to £150,000.
- Specialist lenders may lend up to £180,000.
The best way to maximise the amount you can borrow is to work with a whole-of-market broker with experience in the self-employed mortgage sector.
Revolution Brokers work with clients who have had a great year of trading, but the two previous years were less successful. This scenario can mean being offered a low mortgage maximum, even if you are now earning significantly more.
In this situation, our team would look to identify the right lender who is happy to consider one year's worth of trading in their calculations and help you find the mortgage of the value you need.
There are other factors to consider; some lenders vary in what income they determine as declarable. For example, some providers exclude bonuses and commission payments, whereas others will incorporate this income before calculating your average annual income.
What Income Can I Use Towards a Self-Employment Mortgage Calculation?
Again, this all depends on the lender and how you manage your business. Declarable income that a lender will consider depends on your circumstances - for example, the calculation for a sole trader will be different than for a company director.
Here are indications of the type of income a lender will include for each self-employed kind of business:
- Sole trader - the net profit shown in your accounts, or your total income as reported on your self-assessment tax return (SA302).
- Partnership - your proportion of the net profits shown in the filed accounts, or your reported share of the income reported on your self-assessment tax return (SA302).
- Limited company - your director's salary, and any dividends received. Sometimes, lenders will look at the total business net profit if there are certain circumstances.
Depending on the lender, you can sometimes include other sources of income to supplement your self-employed business earnings - these can include:
- Investment income
- Rental income
- Income from Trusts
- Overseas capital earnings
- Earnings made in a different currency
- Bursaries or stipends received
- Pension benefits - whether personal, workplace or state pensions
How Can I Improve My Approval Chances With the Best Mortgage Lenders for Self-Employed People?
Typically, self-employed applicants will share with a lender:
- Self-assessment tax returns (SA302s).
- Filed or finalised business accounts.
- Projects accounts or trading figures.
Most commonly, these need to cover the last two to three years, but some mortgage providers will be able to lend with evidence of a year's trading, and sometimes less.
Specialist lenders can also accept other forms of proof, such as:
- Payslips from your company, or family business.
- Handwritten payslips to evidence cash income.
You might also be asked to provide other documents, including:
Which is the Best Bank for Self-Employed Mortgage Interest Rates?
To make sure you get the best interest rates on the market, you can:
- Save for as high a deposit value as you can.
- Check your credit report is accurate and up to date.
- Keep your accounts in good order.
The easier it is to verify your income and process your application, the more likely it will be approved.
As an independent broker, the Revolution team will also help you prepare your personal finances before making an application - such as optimising your credit report and improving your credit score wherever possible.
Sometimes, we might advise waiting for an issue on your credit file to expire before applying, taking out responsible borrowing to build up a credit history, or identifying errors in your credit report to have these corrected.
Expert Advice Finding the Best Mortgage Lenders for Self-Employed Applicants
By far, the best way to maximise your mortgage lending options is to work with a professional broker who understands all the essential factors in applying for a self-employed mortgage.
We work with lenders across the markets to negotiate outstanding deals and advise you throughout the process to give you the best chances of securing the lending you require.
Contact the Revolution team today on 0330 304 3040 or send a message to [email protected], and we will get the ball rolling!
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