Self-employed mortgage obstacles
Being self-employed often brings a unique set of challenges. The last thing you need is the hassle of finding the perfect mortgage. Moreover, meeting lender requirements as a self-employed individual can be challenging and frustrating. At Connect Mortgages, we strive to ease these difficulties. Our goal is to provide a smooth path to securing your mortgage, allowing you to concentrate on your business and financial success.
We have designed a tailored approach specifically for self-employed individuals like you to ensure a seamless mortgage acquisition process. Our expert team understands the complexities of your financial situation. Consequently, we are dedicated to simplifying your mortgage application journey.
Who is constituted as self-employed?
There are various types of self-employed individuals, each with distinct roles and responsibilities.
Freelancers: A freelancer offers services to clients or businesses on a contractual basis. They work independently and are self-employed. Freelancers provide diverse services, including writing, graphic design, web development, and consulting. Each project is unique, and they are not bound by long-term employment.
Sole Traders: A sole trader, or sole proprietor, operates and owns their business entirely independently. This structure means no legal distinction exists between the owner and the business. Sole traders manage all business aspects, from finances to legal obligations.
Contractors: A contractor performs work or provides services under a contract for another entity. They are hired for specific projects or tasks and work independently of the hiring company. Unlike employees, contractors do not have long-term job security.
Why is it so hard to secure a mortgage when you’re self-employed?
Although ‘self-employed mortgages‘ is a common term, it can be misleading. Nevertheless, self-employed applicants are not barred from using mainstream mortgage products. However, the challenge arises in how lenders evaluate affordability for self-employed individuals. Consequently, obtaining the required finances can be challenging for these applicants.
Determining mortgage affordability for PAYE employees is usually straightforward. Firstly, provide your annual salary as shown on your payslips. Consequently, lenders apply a formula to assess your borrowing capacity.
However, obtaining a mortgage differs for the self-employed. For instance, you might earn through dividends or director’s loans instead of regular wages.
Additionally, you might retain cash in your business for various reasons. For example, your company could be newly established, affecting your available funds. Moreover, calculating an exact ‘annual salary’ becomes more complicated if your income fluctuates annually.
Lenders may struggle to assess the loan amount they can offer you. Consequently, their risk increases. Nevertheless, the complexity of your application depends on your self-employment type.
For example, issues are minimal if you are a solo entrepreneur with several years of accounting records and stable income. On the other hand, operating through a limited company and earning from unconventional sources may cause complications.
Self-employed mortgage obstacle no. 4
Following these self-employed mortgage tips can significantly increase your chances of approval on your first attempt.
Provide Two Years of Income Evidence
When applying, prepare to prove your self-employed income. You will need at least two years of certified accounts. An SA302 form and a tax year overview are required for your mortgage request to proceed. These documents show your earnings and tax paid, giving lenders confidence in your financial stability.
Save a Generous Deposit
Having a larger deposit opens more lending opportunities. This initial sum is crucial in securing a lower Loan to Value (LTV) mortgage. Moreover, a lower LTV can grant you a better interest rate. Consequently, your monthly payments will decrease, and you might pay off your mortgage sooner. A substantial deposit reflects your financial commitment and reduces risk for lenders.
Maintain a Good Credit Score
A good credit score is vital when applying for a mortgage. It shows lenders that you are a reliable borrower. Lenders with a high credit score will likely trust your ability to repay. This trust increases your chances of mortgage approval. Also, maintaining a good credit score can improve the terms lenders offer. Therefore, ensure your credit history is clean and managed well.
In summary, be prepared with the right documentation, save a significant deposit, and maintain a solid credit score. Doing so will enhance your chances of obtaining a mortgage as a self-employed individual.
Types of self-employment
Self-employment is expanding rapidly, and more people are exploring this sector to diversify their careers. Consequently, it’s vital to understand the terminology used in this domain.
Business roles often involve complex terms describing company structures or trading methods. These can confuse newcomers, but learning them is essential for success.
As the self-employment sector grows, understanding the language becomes increasingly important. It helps to navigate the intricacies of business. However, these terms can be daunting for many.
Yet, with time, you can grasp these concepts. Being familiar with them is crucial for thriving in business. Each term has a unique role and purpose. Therefore, take the time to learn and understand them.
When choosing the legal form of your business, you have three options:
Partnership: In a partnership, two or more individuals or entities collaborate to run a business. They share both ownership and responsibilities. This structure is often chosen by those wishing to manage and invest in a business venture jointly. Partnerships are common and enable shared decision-making. Each partner contributes to the business and shares in the profits and losses. It’s a flexible way to pool resources and expertise.
Limited Company: A limited company, or Ltd., is a legal entity that offers limited liability protection to its owners. The shareholders’ personal assets are safeguarded from the company’s debts and legal obligations. This separation makes it a popular choice for many businesses. Limited companies provide a protective shield for owners while allowing for flexible management. They are known as “limited liability companies” (LLCs) in some regions. This structure is favoured by those seeking financial protection and operational flexibility.
Self-employment: Self-employment means running your own business or working as an independent contractor or freelancer. Unlike traditional employment, self-employed individuals manage their work, clients, and finances independently. They operate without the constraints of an employer. Self-employment offers freedom but requires taking on full responsibility for business operations. This arrangement suits those who prefer autonomy over their work and schedule.
When it comes to finances, lenders look closely at your income. If you’re a company director, you might not be considered self-employed. For those under the Construction Industry Scheme (CIS), you might feel stuck between employment and self-employment. Your employer deducts 20% of your wages under CIS. However, completing your tax assessment form is crucial despite these deductions.
How will a mortgage lender for self-employed mortgages calculate my earnings?
Securing a self-employed mortgage slightly differs from obtaining traditional mortgages. The lender will assess which components of your income will be used. This could include;
- Salary plus dividends,
- Share of net profit or
- Even salary and net profits
What problems could you face getting a mortgage if you are self-employed?
Working as a contractor or freelancer offers several perks. First, there’s the flexibility. Second, the variety in work keeps it interesting. However, income can vary unpredictably from year to year.
Thankfully, some lenders average your income over several years. This approach benefits those with a stable freelance track record. Nevertheless, frequent earnings fluctuations complicate matters. Consequently, lenders may focus on your recent financial history for credit applications.
An experienced broker’s knowledge is invaluable here. They understand how lenders calculate freelance income. Moreover, they can advise on the most suitable loan types for your situation. This guidance ensures you make informed financial decisions.
