Self employed mortgages

If you're not getting paid by an employer, and your main income comes from your own business whether that be as a freelancer, contractor or business director, banks will view you as self employed.

A good place to start off is checking whether you get paid through PAYE.

Also, lenders will view you as self employed if you own more than 20% to 25% of a business, from which you earn your main income.

You could be a sole trader, company director, or contractor, but you will apply for a mortgage in a similar way.

There is no such thing as a self employed mortgage. As I already hinted at, you apply for the same mortgage deals as everyone else.

Again, like anyone, the types of mortgage deals and rates you'll be offered will depend on nothing more than your affordability and property. So, all the same rules still apply; how much is your deposit, what's the LTV, is the property of standard construction, how much debt do you have, how old are you, and so on.

The biggest difference is that you'll have to pass the lender's affordability checks in a different way.

You can't just get the latest 3 months' worth of payslips to prove your income, but equally, don't be mistaken into thinking that you'll always need certified accounts that show a regular self employed income for the past 3 years either.

Lenders do not offer special rates, more expensive or otherwise, to self employed workers. You simply apply for the deal you want and they assess you as a self employed worker.

To recap, there's no such thing as a 'self employed mortgage', but as a self employed person, you need to prove your income on a mortgage application a little differently.

You don't have official payslips so you'll need to pull together a range of other documents, so lenders can be certain of your income and your ability to repay any loan in the future.

Working for yourself and your mortgage documents

It can vary depending on your specific type of employment and your lender, but here is a general guide to getting your paperwork in order, so you can prove your income.

• At least 2 years of certified accounts - don't panic if you don't have them just yet
• A tax calculation (SA302) form or a tax year overview (from HMRC) for the past 2 or 3 years
• Any record of upcoming contracts - if you’re a contractor
• All records of dividend payments and salary - if you’re a company director

Bear in mind this is only what you will need to prove your income, there will be more documents needed for the full application.

What if you don't have 2 years of SA302s or accounts?

You can still get a mortgage.

It is just more difficult to convince the lender that you are low risk. Therefore you may be offered higher rates or a smaller loan than you first apply for. You can mitigate some of this risk for the lender by providing any evidence of future income (remember all the documentation they require is so they can establish your ability to repay) so any evidence of regular work such as retainers or providing proof of future commissions may help.

How do lenders calculate your self employed earnings?

When you work for yourself, mortgage lenders will calculate your earnings based on the net profit of your business. That is generally true whether you are a freelancer or sole trader.

As mentioned they like to base this affordability decision off at least 2 years of accounts; the more detail they have, the more accurate they believe their assessment is.

If you've enrolled for Self Assessment and submit your accounts to HMRC you'll already have this info within the SA302 form – an official document the lender will want to see.

There is a slight difference if you are applying for your mortgage while in a partnership or as a director of your own company, though.

Partnerships

Here, quite simply, the lender will only look at and assess your share of the net profits.

Directors of limited companies

When you are a director of a limited company, you'll want lenders to assess your affordability on both your dividend of the profits and any salary you pay yourself. So, make sure your accounts show both of these income streams.

It is possible that some lenders will only assess you on a salary, but your Mojo adviser can help you find a lender who will use your profit shares too.

Most lenders will not use any retained profits in their affordability calculations.

Using an accountant for your mortgage application

As mentioned, HMRC's SA302 document is really helpful, but banks also like to see certified accounts.

If you don't have an accountant and don't want to get one, it's not the end of the world, we may be able to use lenders who don't require it.

However, even if you apply for a mortgage without certified accounts, be knowledgeable about your income records. It can be particularly useful if you can explain away certain periods of low income in the past for instance. Also, and this should go without saying, make sure your accounts are up to date before you apply!

The other benefit of using an accountant is that they may be best placed to help you walk the tightrope between legally reducing the amount of tax you pay on your profits and making sure they are big enough to get the mortgage you need.

What's an SA302 form and how do you get one?

The SA302 form is an official document from HMRC that shows your tax break down and earnings based on your Self Assessment tax returns.

You use a SA302 form to prove your earnings when applying for to a mortgage lender.

You can find yours by logging into your HMRC online account:

• Go to 'Self Assessment'
• Go to 'More Self Assessment Details'
• Click on 'Get your SA302 tax calculation'
• Click the option to print your tax calculation

Aside from proving your income, the biggest difference regarding applying for a first time buyer mortgage is showing where your deposit has come from.

This may not be an issue at all, but if you plan to use business funds to provide your deposit, it can be more helpful to take regular money out of the business over time rather than one big lump sum before you apply. It can sometimes help avoid underwriting delays.

Applying for a remortgage as a self employed worker is very similar to applying for your first mortgage, or moving house. As with any remortgage, the main difference is that a bank will be using your equity instead of your deposit to work out your LTV and rate.

Newly self employed and first time remortgages

The only exception to this is applying when you want to remortgage for the first time since becoming self employed. Providing you have worked for yourself long enough to assure lenders of your income, there should be little issue.

You can run into some issues if your new income is a lot lower than your old fixed income as an employee, or if you haven't had time to build up the required account history.

You should still have options with your existing lender in these cases. You will have a history with them and they will have seen you have had no issue making your mortgage repayments while being self employed. There's a good chance they could product transfer you to a better rate, certainly better than their SVR, anyway.

Because when you remortgage you are simply applying for a mortgage with a new lender, you will need to pass all the same affordability criteria as before. That means you will still need to dig out the SA302s and dust off the accounts.

I'll try to answer some of the questions that we are asked the most. But if you have any specific question about applying for a mortgage while working for yourself, let us know.