what income do mortgage companies look-at self employed

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What counts as Self-Employed?

In order to be considered Self-Employed for the purposes of a mortgage application, you will need to earn the majority of your income through Self-Employed business activities. These include Sole Trader or freelance positions, Contractor roles and Limited Company Director. If you are a partner who owns more than 20% of your business, your income derived from this activity is also classed as Self-Employed income.

The percentage of UK workers who can be considered as Self-Employed has risen considerably in recent years. Despite this, Mortgage Lenders still perceive this form of income to offer less stability than the PAYE income. This means that your mortgage will be calculated slightly differently than it is for employed people and you will have to provide more documentation in support of your income.

Proving your income

The way that you prove your income will vary, based on the type of Self-Employed activity you carry out. In order to mitigate risk, most Mortgage Lenders will want to establish an average income over a period of time, usually two to three years of trading.

Sole Trader

Sole Traders and freelance workers will need to provide sufficient evidence of their earnings over the lender’s specified duration. An average of their earnings for that duration will be considered their annual income for the purposes of the mortgage calculation. You will need to provide the following documentation as proof:

  • Certified accountants for the relevant years
  • SA302 forms for the same duration
Proving your Income as a Company Director

For Limited Company Directors lenders will calculate your mortgage based on an average of your personal salary and dividends over their required period. Some may be willing to consider the net business profits alongside your personal income. As a partner, your share of the net income will be used. In either case, the following is likely to be required:

  • Certified accountants for the relevant years
  • SA302 forms for the same duration
  • Business bank statements
  • Evidence of dividend payments and retained profits 
Proving your income as a Contractor

Most Mortgage Lenders will use an average of your previous years of accounts, however if your income shows a continuous downwards trend, only your most recent year’s earnings will be used as your annual salary. 

If you’re paid a day rate, some lenders will use an annualised figure based on that to calculate your average annual income. Whatever method is used, to prove your income, you will need:

  • Certified accountants for the relevant years
  • SA302 forms for the same duration
  • Evidence of work contract for current and often future agreed terms

Do Self-Certified Mortgages Still exist?

Self-Certification mortgages have not been used for some time. They were discontinued in 2014 due to lenders over-extending borrower’s affordability. Self-Employed mortgage applicants now need to provide substantial evidence of their income, to prevent similar issues.

How do you go about getting a mortgage if you are Self-Employed?

Other than the additional proof of income, there is no difference when applying for a mortgage as a Self-Employed or employed borrower. Self-Employed mortgage applicants will benefit from more substantial preparation in advance of their application and advice from Mortgage Brokers like First Step.

How do I improve my chances of my mortgage application being approved?

The best way to secure a mortgage as a Self-Employed applicant is to ensure that you are prepared before you apply. The following pre-application preparations will improve your chances of having your application approved:

Financial Preparation

Your accounts should be up to date and if you ordinarily file your own, signed off by a certified accountant for your mortgage application. You can also obtain SA302 tax returns and bank statements in advance.

Increase deposit saving

If you take the time to save a more substantial deposit, you will both increase the mortgage options available to you, give you access to lower mortgage rates and improve your chances of acceptance.

Check your credit score

Use an online credit score provider and if necessary, work on improving your credit rating, prior to your application by:

  • Closing old accounts
  • Updating address details
  • Appearing on the electoral roll
  • Paying bills promptly
  • Minimise credit usage
Speak to First Step

As Mortgage Brokers who specialise in helping Self-Employed applicants, we can help you find those lenders willing to consider your circumstances. Our knowledge of what each individual lender requires in support of your application means that we can help you prepare sufficiently, reducing the chance of rejection. We can ensure you’re accessing the most beneficial mortgage deals available for your personal financial and employment situation.

Your home may be repossessed if you do not keep up repayments on a mortgage