Securing a mortgage as a self-employed person can seem quite challenging, but it can be achieved with the right preparation. Lenders often treat self‑employed applicants with more scrutiny than standard salaried borrowers. Understanding what the self-employed mortgage landscape looks like and what documentation is required can significantly enhance your chances of approval. This article explores key considerations for self-employed mortgage applicants, such as eligibility, documentation, deposit requirements and lender types.
Self-Employment and Mortgage Accessibility
Lenders typically define self‑employment as being a sole trader or owner of at least a 20% share of a business, whether a partnership or company. You may also be considered self-employed if you work as a freelancer. Those working with agencies that pay through an umbrella company, while not always considered self-employed, may also face similar strict scrutiny. For self-employment applicants, proving income reliability is key for securing a mortgage. Most lenders require at least two years of consistent trading with evidence that income is stable or rising. This helps them assess that you can meet regular mortgage payments, including if interest rates were to jump up. Lenders may also request three years of tax returns if income is uneven.
What Documentation is Required?
When applying for a mortgage, the standard documentation for self-employed borrowers includes:
- Two years’ SA302 tax calculations and Tax Year Overviews from HMRC
- Two years’ certified accounts, ideally prepared by a professional accountant
- Personal and business bank statements, usually for the last three to six months
- Proof of ID and address, such as a passport, driving licence, or utility or council tax bill
If your income has decreased in the latest year, certain lenders may use the most recent figure rather than an average.
Deposits and Loan‑to‑Value (LTV)
A larger deposit improves your eligibility and access to better mortgage rates. Typical mortgages require at least a 10-20% deposit, with top deals often accessible at 25% or more. The principle that applies to “standard” mortgages also applies to self-employed home loans: the larger your deposit, the more attractive you are to lenders and the lower your payments.
Credit Score, Spending and Affordability
For a self-employed mortgage applicant, lenders assess your credit history and outgoings to ensure you can afford the mortgage payments. A strong credit record boosts your chances. Bank statements are also reviewed for any large or unusual transactions. It is advisable to reduce unsecured debts, limit new credit applications and maintain a good credit score. It is also important to remember that every time you apply to a lender, they will do a credit search. If they reject you, it will be recorded on your credit file and potentially damage your score. This is one reason why it is advisable to work with a mortgage broker.
Choosing the Right Mortgage: Specialist vs High‑Street Lenders
- High‑street banks such as NatWest, Nationwide and Lloyds will consider self‑employed applicants who can provide at least two years of trading history and full financial documentation. They tend to be more risk-averse and typically apply standard income assessment rules.
- Specialist lenders may offer more flexibility for self-employed applicants with less than two years of accounts, uneven income or unique financial situations. These lenders often take a more personalised approach to affordability.
Apply for an Agreement in Principle (AIP)
An Agreement in Principle (AIP) gives you a conditional indication of how much you can borrow, and it does not impact your credit score. Acquiring an AIP early in your home-buying journey can help you understand what properties are within your budget and shows estate agents that you are a serious buyer. While it is not a guarantee of mortgage approval, it strengthens your position when making an offer. Some lenders may revisit your affordability at the full application stage, especially if your income fluctuates, so ensure that your figures are accurate and well-documented even at the AIP stage.
Working with Brokers
Mortgage brokers can provide access to lenders not available directly to the public and support you in presenting your case, especially where income streams are complex. This is also helpful with keeping your credit file healthy. Ensure that you select a broker with self-employed mortgage experience. A knowledgeable broker will understand how to present your income, accounts and any fluctuations in the best possible light. They can also advise on which lenders are more flexible with self-employed applicants, potentially increasing your chances of approval. In many cases, a broker can save you time and money by steering you away from unsuitable lenders and helping you secure more competitive deals.
Potential Pitfalls to Avoid
- Insufficient documentation: Without SA302s, annual tax overviews, certified accounts and recent bank statements, lenders may be unable to verify your income. Lack of evidence can lead to delays or outright rejection.
- Recent drop in income: If your income has decreased compared to previous years, lenders are likely to use that lower figure when assessing affordability. This can reduce the amount you will be eligible to borrow.
- Unusual large expenses: Unusual large spending can raise red flags for lenders. Be prepared to clarify any such unusual transactions.
- Inadequate deposit: A smaller deposit increases the lender’s risk and may restrict you to higher interest rates or fewer mortgage products. Aim for at least a 10-15% deposit, with 25% or greater giving you access to more and better deals.
Conclusion
Securing a self-employed mortgage requires more preparation than a “typical” application, but it is possible to obtain such a mortgage. By gathering the required paperwork and working with experienced brokers, you can potentially navigate the process successfully. A clear understanding of what lenders need will position you well for obtaining a self-employed home loan. With diligent research and the right guidance, homeownership can be well within reach for the self‑employed.
FAQs
Q. Can I get a mortgage if I have only been self-employed for one year?
A. It is possible, but your options are likely to be limited. Most mainstream lenders prefer at least two years of trading history, though some specialist lenders may consider one year if you have strong income and supporting documentation.
Q. How will lenders assess my income if I am self-employed?
A. Lenders typically look at your average annual income over the last two or three years using personal tax documents (tax returns, SA302s and annual tax overviews), company accounts and company tax returns. If your income has dropped recently, they may use the most recent lower figure when calculating what you can afford to borrow.
Q. Do I need a bigger deposit if I am self-employed?
A. Not necessarily, but having a larger deposit strengthens your application. While some lenders accept 5-10%, a deposit of 15-25% or more often improves your chances and also gives you access to better mortgage interest rates.
Q. Will being self-employed affect the types of mortgage I can get?
A. No, self-employed applicants can generally apply for the same types of mortgage as employed borrowers. The main difference is the way your income is verified, which may affect your lender choice and the borrowing amount.
Q. Should I use a mortgage broker if I am self-employed?
A. Yes, using a broker with experience in self-employed mortgages is highly recommended. They can identify the most suitable lenders, help you prepare your documents and increase your chances of a successful application.
Additional Sources
https://www.experian.co.uk/consumer/mortgages/guides/self-employed.html
https://www.natwest.com/mortgages/applying-for-a-mortgage/self-employed-mortgage.html
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