How much can I borrow on my mortgage if I’m Self-employed?
The amount you can borrow when self-employed and applying for a mortgage, will be dependant on many different factors.
In this article we will breakdown the type of things that are likely to affect the amount you can borrow. We want to help put you in the best possible position when applying for a mortgage.
Why applying for a mortgage when self-employed can be different.
Applying for a mortgage when self-employed can present some unique challenges. When you are employed, it is easy to forecast your income and to show a clear track record. When you’re self-employed your income will likely vary, which can make applying for a mortgage more complex.
Being self-employed means you may face additional checks from mortgage lenders when it comes to your income, expenses, and overall financial stability. This can include providing more documentation than an employed person might need to provide.
Despite these challenges, many self-employed individuals can secure a mortgage. The key is to be prepared and know what to do to put you in the best possible position to be accepted.
We are going to explore in more detail what lenders look for when assessing someone who is self-employed and how you can best prepare.
What are lenders looking at when assessing a self-employed application?
When assessing self-employed borrowers, lenders will typically be looking at a few key things:
Consistent income: When self-employed it is harder to show a consistent income. Your income is normally declared once every 12 months at the end of the tax year. This makes showing a steady income difficult. Each lender will have different criteria around how they asses your income. Some lenders will require three years history with others only requiring one year. However, most lenders will want to see your latest 2 years self-assessments which gives them enough track record of your income.
Business profitability: As well as looking at your personal tax returns it is likely that a lender will also request the last 2 years records of your full business accounts. This is to ensure to the company is profitable and can support your income.
Financial stability: Mortgage lenders will also want to assess your financial stability which will include looking at any outstanding debts you have. This will include things like Credit Cards, Loans, Car Finance etc. This is the same whether you are employed or self-employed.
Documentation: It is likely that being self-employed means the mortgage lender is going to request extra documentation than they would if you were employed.
The extra documents you might be asked for are:
– Company Accounts
– Business Bank Statements
– Accountants Reference
The key is to be prepared, organised, and able to demonstrate your income and financial stability. By doing this you improve your chances of being approved for a mortgage.
How do you calculate your income when self-employed?
Calculating your income when self-employed can prove a bit harder than when employed. Each mortgage lenders will also assess this differently. This is why it is a good idea to speak to a mortgage broker who specialises in self-employed mortgages.
Self-Assessments: Lenders will typically want to see at least 2 years tax returns to assess your income when self-employed. There are some lenders that require a minimum of three years and some only one. This will all depend on the specific lender and your individual circumstances.
If you are a Sole trader, then the income used will likely be your net profit for the tax year. The net profit is the figure left after you have taken off all your business expenses for the year.
If you are a limited company director, the income used will likely be director’s salary plus any dividends you have taken.
There are lenders that will use directors salary plus the net profit left in the company. This is different from lender to lender which is why it is important to speak with a mortgage adviser who can make sure you find the right lender to fit your individual circumstances.
The way in which your income will be assessed when self-employed will vary from lender to lender. An example would be one lender taking an average of the last two years income and another taking the most recent year and not an average. There are many variables to consider and a mortgage broker will be able to help you identify which lender best fits with your current income, to give you the best chance of being accepted.
What can affect the amount you can borrow when self-employed?
Income: The most important thing a mortgage lender is looking at is your income. The way in which a lender assesses this can vary largely from lender to lender. Two different lenders might have a completely different amount they are prepared to lend to you. It is important to get advice from a professional who can make sure you are dealing with the right mortgage lenders for your circumstances.
Deposit: This is the same for everyone applying for a mortgage. The size of your deposit can be a factor when a mortgage lender is assessing your mortgage application. Usually, the bigger the deposit the better.
Business profit: As well as looking at your personal income a lender is likely to want to see your full business accounts to make sure the business is making profit. This can have an effect on your application, so it is important to make sure your company accounts are all up to date and in order.
Credit score: Your credit score is always an important factor when applying for a mortgage. All lenders will have different credit scoring system with some allowing for a lower credit score than others. It is always best to check your credit before applying for a mortgage to make sure everything is in order.
The amount you can borrow on a mortgage when self-employed can vary from lender to lender and is affected by lots of different variables. It is best to get mortgage advice to make sure you are getting the right mortgage for you.
How to improve your chances of being accepted for a mortgage when self-employed?
Securing a mortgage when self-employed can be a bit trickier than when employed.
Below are a few tips to give you the best chance of being accepted for a mortgage when self-employed.
Keeping good income records: Making sure all your accounts and tax returns are up to date and recorded accurately is essential when applying for a mortgage. It is also a good idea to make sure your business banking is all up to date and you have access to business bank statements.
Monitor your credit score: A good credit score can improve your chances of being approved for a mortgage. It is a good idea to monitor your credit file and if you are looking for ways to improve your credit score then read our latest blog.
Reduce your debts: If you have the option to do this then it can sometimes be a good idea to reduce/clear any debts you might have. This is dependent on your personal circumstances so it’s best to talk it through with a mortgage broker first.
Work with a mortgage broker: Working with a mortgage broker who understands the process of the self-employed mortgage application could potentially save you a lot of time and money. It could be the difference between being able to secure a mortgage and not.
Being self-employed doesn’t have to hold you back from buying your dream home. With the right preparation and planning, you can put yourself in a strong position to buy that dream home!!
Here at Complete Mortgage Advice we are self-employed mortgage specialists and we have extensive knowledge on this market. If you are self-employed and thinking of applying for a mortgage then get in touch and see if we can help you.
Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances..