Being self-employed offers freedom and flexibility, but it can present challenges when it comes to securing a mortgage. Lenders typically view self-employed individuals as higher-risk borrowers due to fluctuating income streams, but that doesn’t mean getting a mortgage is out of reach. With the right preparation and understanding of what lenders are looking for, you can improve your chances of securing a mortgage as a self-employed worker.

Here’s a guide to help you navigate the process and increase your likelihood of success.

1. Proving Your Income

One of the main hurdles for self-employed individuals is proving consistent income. Unlike salaried employees who can present pay slips, you’ll need to show that your business is generating stable earnings. Most lenders require a minimum of two years’ worth of financial records, such as tax returns, to assess your income reliability.

Lenders may also ask for additional documentation, including:

• Tax calculations (SA302 forms) from HMRC
• Business accounts prepared by a qualified accountant
• Bank statements

If your income varies significantly year to year, lenders may take an average of the past two or three years’ earnings, or they may use the most recent year’s income as a guide.

How to improve your chances: Maintain clear and organised financial records. Having your accounts professionally prepared by an accountant can add credibility to your application and make it easier for the lender to assess your income stability.

2. Building a Strong Credit History

Your credit score plays a vital role in your mortgage application, regardless of your employment status. Lenders will look at your credit history to determine how well you’ve managed debt in the past. A higher credit score can open doors to better mortgage deals, while a poor score might limit your options.

If you’ve had any issues with debt in the past, it could affect your mortgage chances. Missed payments, defaults, or county court judgments (CCJs) may raise red flags for lenders.

How to improve your chances: Before applying for a mortgage, check your credit report to identify any errors or issues. Make sure you’re paying bills on time, reducing outstanding debt, and avoiding unnecessary credit applications. You may also want to consider working with a mortgage broker who specialises in self-employed clients.

3. Saving for a Larger Deposit

While employed individuals may be able to secure a mortgage with a 5-10% deposit, self-employed borrowers are often expected to put down a larger deposit. A bigger deposit reduces the lender’s risk, making it easier for you to secure a mortgage and potentially access better interest rates.

Typically, self-employed borrowers should aim for a deposit of 15-25% of the property’s value. A larger deposit can also help offset the impact of any income fluctuations or lower credit scores.

How to improve your chances: Start saving early and aim for a larger deposit than you think you might need. Not only will this improve your chances of approval, but it could also reduce your monthly payments and interest costs.

4. Choosing the Right Lender

Not all lenders approach self-employed mortgage applicants in the same way. Some lenders are more flexible and have tailored mortgage products specifically for the self-employed, while others may have stricter requirements.

It’s important to research different lenders or consult a mortgage broker who understands the self-employed market. A broker can help match you with lenders who are more likely to approve your application based on your circumstances.

How to improve your chances: Use a mortgage broker who specialises in working with self-employed borrowers. They’ll have access to a wider range of lenders and can guide you to the most suitable options for your financial situation.

5. Timing Your Application

Timing can play a crucial role when applying for a mortgage. If you’ve recently become self-employed or have had a bad year of trading, it might be worth waiting until you have a stronger financial record before applying. Lenders typically prefer applicants who have been self-employed for at least two years, though some will consider those with one year of accounts, especially if there’s strong evidence of future earnings.

How to improve your chances: If possible, wait until you’ve built a solid financial history before applying. If you’re approaching the end of a particularly good financial year, consider applying soon after your accounts have been finalised to show lenders a stronger income figure.

6. Minimising Personal and Business Debt

Lenders will assess your debt-to-income ratio to determine how much you can afford to borrow. If you have significant personal or business debt, it may reduce the amount you can borrow or result in higher interest rates.

Clearing or reducing your personal debts, such as credit cards or loans, can strengthen your mortgage application. Similarly, reducing business debt will help improve your overall financial picture.

How to improve your chances: Work on paying down any outstanding debts before applying for a mortgage. This will improve your debt-to-income ratio, showing lenders that you’re financially responsible and reducing the risk associated with lending to you.

7. Considering Joint Applications

If your partner is employed and has a stable income, applying for a joint mortgage could improve your chances of approval. Lenders will consider both incomes when assessing affordability, and your partner’s stable employment might offset any concerns they have about your self-employment status.

However, remember that both parties are equally responsible for the mortgage, and any missed payments will affect both of your credit scores.

How to improve your chances: If you’re in a stable financial situation with your partner, consider applying for a joint mortgage. This could increase your borrowing potential and reduce the level of scrutiny on your self-employed income.

Securing a mortgage as a self-employed individual may require more preparation, but with the right steps, it’s absolutely achievable. By maintaining clear financial records, improving your credit score, saving for a larger deposit, and working with a specialist broker, you can improve your chances of getting the mortgage you need to purchase your dream home.

Every lender is different, so it’s important to explore your options and find the best fit for your unique financial situation. With the right approach, self-employment doesn’t have to stand in the way of homeownership.

Follow us