Self-employed mortgage obstacles
Being self-employed can often bring a set of difficulties, and the last thing you want is to spend your time searching for the perfect mortgage arrangement. Furthermore, adhering to lender prerequisites while being self-employed can prove to be both demanding and exasperating. We aim to alleviate these burdens, ensuring a smooth path to securing your mortgage so that you can focus on your entrepreneurial endeavours and financial well-being.
To ensure a seamless mortgage acquisition process, we’ve developed a specialised approach explicitly tailored for self-employed individuals like you. Our dedicated team at Connect Mortgages understands the intricacies of your financial situation, and we’re committed to streamlining the mortgage application journey.
Who is constituted as self-employed?
There are various self-employed individuals, such as;
- Freelance: A freelancer is an individual who offers their services or skills to clients or businesses on a contractual basis rather than being employed as a full-time or part-time employee. Freelancers are typically self-employed and work independently. They often provide services in various fields, such as writing, graphic design, web development, photography, consulting, and more.
- Sole traders: A sole trader, also known as a sole proprietor, is a type of business structure in which an individual operates and owns a business entirely independently. This business form has no legal distinction between the owner and the business entity. The sole trader is personally responsible for all aspects of the business, including its finances, operations, and legal obligations.
- Contractors: A contractor is an individual or a business entity that provides services or performs work for another individual, business, or organisation under the terms of a contract or agreement. Contractors are typically hired for specific projects, tasks, or assignments and work independently rather than being employees of the entity that hires them.
- Company directors: A company director is an individual appointed to oversee and manage the affairs of a company, ensuring that it operates efficiently and in accordance with applicable laws and regulations. Directors play a crucial role in a company’s governance and decision-making processes and are often responsible for setting the company’s strategic direction.
When an individual operates their business and takes full responsibility for its success or failure, they can be considered ‘self-employed’.
The freedom of being self-employed comes with unique challenges, such as an income that could be more complex. Drawing a salary or retaining profits in the business are two common methods for earning money, and you may even receive dividends or director loans. However, one main issue is how your income can vary from year to year.
Traditional lenders can be pretty selective about their requirements when lending to self-employed people.
Why is it so hard to secure a mortgage when you’re self-employed?
Although ‘self-employed mortgages‘ is a widely used phrase, it is quite deceptive. Self-employed applicants are not prohibited from utilising mainstream products. Instead, the issue lies in how lenders assess affordability regarding self-employment. As a result, it can be difficult for these people to obtain the finances they need.
Establishing mortgage affordability for PAYE employees is relatively effortless. First, provide your annual salary on pay slips. The lender will then use a calculated formula to figure out how much you can borrow.
For the self-employed, obtaining a mortgage differs. For example, instead of receiving wages monthly, you might be making money through dividends or director’s loans.
On the other hand, you may need more cash in your business for numerous reasons, or you could have been running your company for just a short time. Furthermore, figuring out an exact ‘annual salary’ amount becomes much more challenging if your income has varied yearly.
Lenders may need help to accurately determine how much of a loan they can offer you, thus increasing their risk. However, your application’s complexity depends on how you are self-employed; if you’re a solo entrepreneur with multiple years of accounting reports and clear income streams, there would be minimal issues. Although operating through a limited company and obtaining an unconventional form of revenue, complications may arise.
Self-employed mortgage obstacle no. 4
By following these self-employed mortgage tips, you can significantly increase your chances of being approved for a loan on the first attempt.
- Provide two years of income evidence: When applying to us, you must be prepared with proof of your income from self-employment. As part of the process, we will require at least two years of certified accounts, an SA302 form and a tax year overview for your mortgage request to proceed.
- Save a generous deposit: You can access more lending opportunities with a larger initial deposit. In addition, a lower Loan to Value (LTV) mortgage allows you to secure an improved interest rate; this, in turn, reduces your monthly payments and potentially accelerates the time required for full repayment.
- Maintaining a good credit score: An impressive credit score is paramount when applying for a mortgage. Lenders will be more likely to trust your ability as a borrower with a high credit score, making them much more likely to accept your application.
Types of self-employment
As the self-employment sector continues to grow and diversify, more people than ever may need to become more familiar with some of the language used to describe these roles in business. The terms often refer to how a company is structured or trades, but they can still seem perplexing for those entering this market. 
When choosing the legal form of your business, you have three options:
- A Partnership: A partnership is a type of business structure in which two or more individuals or entities collaborate and share ownership and responsibilities for operating a business. Partnerships are a common form of business organisation and are often chosen by individuals who want to manage and invest in a business venture jointly.
- Limited Company: A limited company, often referred to as a “limited liability company” (LLC) or “limited company” (Ltd.), is a legal business structure that offers its owners, known as shareholders or members, limited liability protection. This means that the shareholders’ personal assets are generally protected from the company’s debts and legal obligations. Limited companies are a popular choice for businesses seeking a separate legal entity that can provide financial protection for its owners while allowing for flexible management.
- Self-employment: Self-employment refers to a work arrangement in which an individual operates their own business or works as an independent contractor, freelancer, or sole proprietor rather than being employed by an employer. In a self-employed capacity, individuals are typically responsible for independently managing their work, clients, finances, and business operations.
This is an essential factor when lenders determine your income rate. Furthermore, you may not be regarded as self-employed if you’re a company director. As a self-employed individual working under the Construction Industry Scheme (CIS), you may feel in limbo between employment and self-employment. Your employer will deduct 20% of your wages, but that shouldn’t stop you from completing your tax assessment form.
How will a mortgage lender for self-employed mortgages calculate my earnings?
Each lender has a different approach when evaluating your self-employment earnings and calculating how much they are willing to lend. Generally, lenders consider the income earned in the last 2 or 3 years with either an average of these years or just your latest year’s earnings, whichever figure is lower. Specific lenders may even use only one year’s evidence of income plus an accountant’s projection if you’ve recently established yourself as a freelancer.
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
Depending on whether you’re an independent contractor, sole proprietor, or company director. After the key points have been discussed, the lender will use their unique ‘affordability model’ to calculate how much you can borrow for your self-employed mortgage. These models are usually kept under wraps but consider probable expenses, income and people living in or dependent on your salary.
To ensure that you can still afford the mortgage, lenders will conduct a ‘stress test’ for whatever amount you wish to borrow. This is why some lenders encourage customers to fix their mortgage rate for five years or longer, so they are immune from any potential interest rate increases. With this measure in place, your mortgagor may also choose to lend more money than usual.
What problems could you face getting a mortgage if you are self-employed?
Obtaining a mortgage requires lenders to evaluate your income to determine if it’s sufficient for loan repayment. Fortunately, this is easily achievable for most employees who can offer recent payslips as evidence.
As a self-employed individual, lenders will look to your accounts and SA302s when determining your income. This is why you must maintain accurate and up-to-date business records. It’s worth noting at this point, too, that although an accountant may seek to reduce your tax by utilising all lawful methods of deduction from taxable income, this could hinder the mortgage process for you. 
Working as a contractor or freelancer has perks, such as flexibility and variety. Unfortunately, this also means that your income can be unpredictable from year to year. Thankfully, lenders may average out the amount of money you’ve earned over several years if you have a consistent track record in contracting or freelance work; however, if there are frequent fluctuations in your earnings, they will likely only look at recent financial history when considering credit applications.
With the knowledge and expertise of an experienced broker, you can be sure they will understand how lenders calculate your income. They can also advise on which loan type is best suited for your specific situation.
The benefits of using a self-employed mortgage broker
A knowledgeable broker will become familiar with you, your income sources and your objectives. Even though there are some difficulties to consider along the way to success in obtaining a self-employed mortgage loan, it is usually still achievable, and that’s where a mortgage broker comes in.
Self-employment’s advantages are plentiful, but some difficulties come with it; you might experience an unsteady income yearly. In addition, mainstream lenders often have stringent criteria and may need to be more open when considering a loan for someone self-employed.
Brokers are equipped to find the right lender for anyone’s unique situation, particularly self-employed ones. Experienced mortgage brokers can determine which option works best for you so that you can secure your dream home.
Having a mortgage adviser on your side can be invaluable when self-employed. They’ve established solid relationships with speciality lenders and demonstrate an unparalleled success rate for getting mortgages for the self-employed. Here are some of their services:
- With the right lender, they can find financing that only requires a 5% deposit.
- With only a year of trading history, they can source a lender that might make an exception.
- Rather than relying on the average of the last three years, they can utilise figures from this year’s data.
- Individuals who have incorporated a limited company can exploit their retained profit by working with specialist lenders.
- The self-employed are included in the mortgage game; their access to specialist lenders makes it possible to secure a loan even with a CCJ or less-than-perfect credit.
- The panel of lenders they use is dedicated to finding the most cost-efficient solution for your needs, and they will guide you through the process while researching an appropriate loan amount.
