As independent professionals, you may face unique challenges when it comes to securing a mortgage. While being your own boss affords you many freedoms, it can also make it difficult to prove your income. However, fear not, as it is more than possible to secure a mortgage while being self-employed in the UK. With proper preparation and the right approach, you can successfully navigate the mortgage process and secure the financing you need. This detailed guide will provide you with key information and steps you can take to improve your chances of getting your mortgage application approved.
Understand the Lender’s Perspective
Before delving into the specifics of securing a mortgage, it’s crucial to understand the lender’s perspective. The self-employed are often viewed as a higher risk by mortgage lenders. This is because your income may be viewed as less stable than someone in traditional employment. Most lenders want to see a steady, regular income that will ensure you can make your mortgage repayments in the long term.
To prove your income, you will need to provide a minimum of two years’ worth of accounts, preferably prepared by an accountant. These should show a consistent or increasing income over the years. You may also need to supply tax return forms known as SA302s. Remember, lenders will look at your net profit, not your turnover, so focus on demonstrating a healthy net income.
Improve Your Credit Score
Next, let’s talk about your credit score – a vital part of your mortgage application. A strong credit score can significantly improve your chances of securing a mortgage as a self-employed individual. Lenders use your credit score to assess your history of repaying debts. A good credit score signals to lenders that you are a low-risk borrower.
So how can you improve your credit score? Start by checking your credit report for any errors. Make sure all your financial details are accurate and up-to-date. Regularly review your credit report and quickly correct any inaccuracies. Consistently paying your bills on time will also boost your credit score. Avoid making multiple credit applications in a short period, as this could signal financial stress to potential lenders.
Work with a Mortgage Broker
Working with a mortgage broker can greatly simplify the process of securing a mortgage as a self-employed individual. A broker is a professional who specialises in finding and arranging mortgages for their clients. They have a comprehensive understanding of the mortgage market, including which lenders are likely to approve applications from self-employed individuals.
A good broker will guide you through the application process, ensuring that you have all the necessary paperwork. They can also advise you on how to present your financial situation in the best light. Remember, a broker has access to a wide range of mortgage products, some of which may not be available to the general public.
Build Up a Healthy Deposit
The size of your deposit can have a significant impact on your mortgage application. The larger your deposit, the less you have to borrow, and the lower the lender’s risk. As a self-employed individual, a larger deposit can compensate for the perceived instability of your income.
Aiming for a deposit of at least 20% of the property value is a good goal. However, some lenders may require a larger deposit if you have been self-employed for only a few years. Be ready to show proof of savings to further demonstrate your financial stability.
Maintain Detailed and Organised Financial Records
Finally, maintaining detailed and organised financial records is crucial. Lenders need evidence of your self-employment income, and your tax returns and business accounts provide this information.
Ensure your accounts are up-to-date and prepared by a qualified accountant. This not only helps to legitimise your financial records, but can also make the process smoother and faster.
In addition to your accounts, keep hold of bank statements, invoices, and any other documents that can provide evidence of your income. It’s also wise to keep records of your contracts and business plans to show the sustainability of your business.
In conclusion, while securing a mortgage as a self-employed individual in the UK can be challenging, it isn’t impossible. With the right approach, thorough preparation, and a clear understanding of what lenders are looking for, you can secure your dream home. While the journey may require a bit more effort, the reward is certainly worth it. After all, there’s nothing quite like the feeling of owning your own home, especially when it’s funded by your hard-earned income as a self-employed professional.
Consider Setting up as a Limited Company
If you’re self-employed, you may want to consider setting up as a limited company to make the process of securing a mortgage easier. This is because mortgage lenders often view limited companies more favourably than sole traders or partnerships.
As an owner of a limited company, you’re both an employee and a shareholder. You can take a salary and dividends from your profits, providing a stable, regular income that lenders like to see. However, bear in mind that lenders will often consider only your salary and declared dividends when calculating your income, not the entire company turnover.
It’s also worth noting that setting up as a limited company involves extra administration and accounting responsibilities. You’ll need to register your company with Companies House and file annual accounts and company tax returns. Remember to weigh up the benefits and responsibilities before making a decision.
Utilise Government Schemes
For self-employed individuals looking to secure a mortgage, there are several government schemes available that might provide assistance. Schemes such as Help to Buy, Shared Ownership, and the Lifetime ISA scheme can all contribute towards your deposit, making securing a mortgage more manageable.
Help to Buy offers an equity loan where the government lends you up to 20% of the cost of your newly built home. Meanwhile, Shared Ownership allows you to buy a share of your home and pay rent on the remaining share. The Lifetime ISA helps you save for either your first home or retirement, with the government adding a 25% bonus to your savings, up to a maximum of £1,000 per year.
Remember, these schemes have specific eligibility criteria, so it’s worth investigating each one thoroughly to see if you qualify.
Conclusion
Securing a mortgage as a self-employed person in the UK may appear daunting, but it’s absolutely achievable with the right preparation and guidance. From understanding the lender’s perspective to boosting your credit score, from enlisting the help of a mortgage broker to building up a solid deposit, there are numerous strategies you can employ.
Maintaining detailed and well-organised financial records can be your strongest ally in this process, displaying clear evidence of your income and the sustainability of your self-employment. Considering setting up as a limited company or utilising available government schemes can also work in your favour.
While the path to homeownership may seem more complex for self-employed individuals, the sense of accomplishment when you secure that mortgage and hold the keys to your new home makes the journey worthwhile. So press on, stay informed, and remember: your dream home is within reach.
