Many self employed people wonder if they will ever be able to step foot on the property ladder. The short answer to the question is "Yes". It is possible to get a mortgage if you're self employed. However, you may need to jump through a few more hoops to qualify.
A common misconception is that there is a special category of mortgage just for the self employed. This isn't the case, but you will go through a different application process. Once you have gone through that process, you will have access to all the same lending products as full-time, salaried workers. The only difference is how you get there.
The self employed mortgage process
All mortgage applications will include affordability checks. This is to ensure that you will be able to afford to pay back the mortgage every month. For a full-time, salaried worker the process is very simple. They can supply copies of their employment contract, payslips and bank statements. But for the self employed, proving your income can be more complex.
Your income might change from month to month. And the source of your income might differ. For this reason, mortgage providers will ask to see yearly accounts to prove your income. They will typically ask for your SA302. This is a breakdown of your tax liabilities for the year. For the newly self employed, this can be problematic.
Common problems for the self employed
There are a few issues the self employed might face when applying for a mortgage. Some lenders may ask to see your accounts for the past three years. If you have only been trading for six months, it doesn't matter if your business is booming, a lender may well turn you away.
Another common problem that the self employed face is in affordability assessments. Lenders will usually allow you to borrow four or five times your annual income. But if your income varies from year to year, this might not work out in your favour.
If you earn £20,000 in your first year, £60,000 in your second year and £40,000 in your third year, one lender might take the average of the three years as your annual income. This would mean you might be able to borrow £160,000, based on a calculation of four times your average annual income.
But another lender might take a more cautious approach, estimating your income at £20,000 per year. This would mean you might only be eligible to borrow £80,000, based on a calculation of four times your average annual income.
What is the solution for the self employed?
The best way to work around these issues is to approach a lender that has your best interests in mind. A lot of people approach their current bank first, assuming that their existing relationship with the bank will make them a good candidate for additional lending products. But this isn't always the case. Working with a specialist lender can help you to secure a much better deal on your mortgage.
If you're applying as a couple with another borrower and one or both of you is self employed, a specialist lender will help you secure a better deal. Finding these lenders might require a little extra work, but this could save you money in the long term.
For additional support, you can search online for specific self employed mortgage choices and advice. For example, here is a free calculator to use. These sites will put you in contact with a specialist mortgage broker with an in-depth understanding of the current mortgage market. With this help on your side, you could find a lender that is more likely to accept your application and a mortgage product with more preferable terms.
Copyright 2021. Article was made possible by site supporter Paul Gordon of 720 Digital.