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How to get a mortgage when you’re self-employed

André Spiteri

Maverick Words Ltd

PRO

When you’re self-employed, getting a mortgage can seem like a pipe dream. Even those who have one perceive the process as being tough — research shows that a third of self-employed homeowners think lenders are biased against them.

That may well be the case. I’m certainly not about to argue otherwise. But while the difficulty level is moot, getting a mortgage when you’re self-employed is definitely doable.

I’d know. I’m living proof.

Three months ago, I was convinced I’d need to ditch my business for the dreaded 9 to 5 if I ever was to get a foot on the property ladder. Today, I think I’ve lost some weight, courtesy of all the hoops I had to jump through. But I’ve got a mortgage in hand.

Here’s how I went about it and what I learned in the process.

Part 1: Laying the groundwork

Full disclosure. This isn’t going to be a quick fix. You’ll need to prepare ahead of time.

The earlier you start, the better. However, my suggestion is to begin at least two years before. Here’s what you need to do.

Get an accountant

All the lenders I spoke to (and I spoke to all the major high street banks) wanted 2 years’ worth of accounts. And they wanted them certified by an accountant. So, your first order of business should be to find a professional you trust to do your books.

Personally, I think an accountant is well worth the expense. Last year, mine got me a £2,500 tax refund. Plus, if HMRC ever decides to investigate you, you’ll have the peace of mind that everything’s in order.

But if you’re planning to get a mortgage, an accountant is a must. So, the way I see it, might as well find one you like and start building a relationship today.

Work on improving your credit score

Like any other kind of credit application, getting a mortgage involves a credit check. So, you’ll need to make sure your credit score is in good shape. Again, this takes time, so it’s worth starting asap.

Building and improving your credit score is a vast and complex subject, and I can’t possibly say everything there is to say about it in this post. ClearScore’s Learn blog is an excellent resource if you’d like to dive deep.

However, here’s the tl;dr version:

These allow you to view your Experian and Equifax credit reports for free. It’s worth monitoring them regularly. In particular, make sure there’s no inaccurate information. And, if there is, call up Experian or Equifax and ask for it to be fixed.

  • Don’t make several credit applications in a short space of time

Every time you apply for credit, your credit score dips slightly, so several applications can have a cumulative negative effect. It also gives lenders the impression you’re having financial trouble, even if it isn’t true. Instead:

  • Use eligibility checkers to find out if you qualify for credit and shop around. These don’t affect your credit score, so you can use them as many times as you like and as often as you like
  • As a rule, avoid making more than one credit application every three months. Spoiler alert: credit cards and loans aren’t the only things that count as credit applications. Some broadband providers, phone networks and other service providers may also run a credit check. They should warn you beforehand. But if you’re not sure, it doesn’t hurt to ask
  • Avoid applying for credit at all in the run-up to your mortgage application
  • Use a credit card little and often and pay it on time and in full as soon as the bill falls due. This is one of the simplest, most powerful ways to improve your credit score, because it shows lenders you can handle credit responsibly
  • Set up direct debits for all your bills so you never miss a payment.

Get a handle on your debt

As part of your mortgage application, the bank will make an affordability assessment. First, they’ll look at how much you make. Then, they’ll look at your expenses — bills, credit card debt, loans, car payments, groceries, the whole works.

Your debt-to-income ratio will have a bearing on whether you qualify for a mortgage and also on how much the bank will be prepared to lend you. For this reason, it makes sense to work on reducing your expenses as much as possible.

You definitely should try paying off any major debts like personal loans and credit card balances before you start looking at mortgages. This can make a huge difference. It’s also worth reining in your spending, at least until your mortgage is approved. Here’s an in-depth article about how to stay on budget, written by yours truly [shameless self-promotion, soz].

Part 2: Finding a lender

With the groundwork in place, you should be in the best position possible to qualify for a mortgage. Now, it’s a question of finding a bank that’ll lend you enough.

The main thing to understand here is that your business structure is going to have an impact on the way banks perceive your income. In my experience, your life will be much easier if you’re a sole trader or a self-employed contractor. If, like me, you operate as a limited liability company, proving you earn enough to get a decent mortgage will be slightly more complicated (though still doable).

Finding a lender as a sole trader

Provided you have at least 2 full years’ worth of certified accounts, finding a lender as a sole trader is probably the most straightforward.

Most banks’ (or mortgage brokers) first question is going to be “What’s your salary?” Substitute salary for your last full year’s profit after tax and there you have it. Then, it’ll be a question of checking your credit rating and your expenses relative to your income to work out how much you can afford to borrow.

Finding a lender as a contractor

If you’re a self-employed contractor, that is you usually take on temporary full-time contracts for one client at a time, it’s worth talking to CMME.

CMME are brokers who specialise in mortgages for independent contractors. The way they explained it to me, they apply your typical day rate to the whole year and use your contract as leverage to work out how much you can borrow.

Unfortunately, as I discovered, they can’t help unless you typically work as a contractor. If you’re a freelancer who mainly does ad hoc projects and, possibly, has a retainer or two, you’re probably better off going directly to a bank or speaking to a traditional mortgage broker.

Finding a lender as a limited liability company

For the uninitiated, the main reason why you’d do business as a limited liability company is tax. Typically, you’d pay yourself a small salary — this is usually less than the personal allowance, so you don’t have to pay any income tax on it — and take the rest of your income as dividends. Basic dividend tax is currently 7.5% compared to 20% basic income tax, so you could potentially save a lot of money.

As you can probably guess, while this approach is great at tax time, it’s counterproductive when you’re applying for a mortgage. This is because, on paper, you’ll look like you earn too little. And the less you earn the less you can borrow. Case in point, one particular lender was only prepared to lend me £9,000. And I live in Edinburgh, where the average flat sells for £215,000.

So what are your options?

Option 1: Pay yourself a bigger dividend

This is the simplest way out. By taking a larger dividend, you boost your income, which means you may be able to borrow more.

Most high street banks I spoke to consider dividends to be part of your salary. So, the upside of this approach is that more lenders may be prepared to work with you.

The downside is that it comes at a cost, because taking out a larger dividend increases your tax bill.

Option 2: Find a lender who takes retained profits into consideration

The other option is to find a bank that will consider your company’s profits after tax, called retained profits, to be part of your income.

The upside is that you can boost your income without having to take out a dividend and pay tax on it.

The downside is that your options will be more limited. Out of all the banks I spoke to, only HSBC and First Direct (the bank I ultimately went with) consider your company’s retained profits to be part of your income.

And that’s all folks. Everything I learned during my search for a mortgage as a self-employed person. I hope it helps.

Got any questions, or have a pro tip I missed? Sound off in the comments.

Comments

10th October 2018

Smylers

Nationwide gave me a mortgage in 2015 with just my two most recent tax return calculations; I just had to phone up HMRC and get them to send them on paper (it’s basically the same as ‘view your calculation’ when logged into Self Assessment, but doesn’t look like you printed it yourself). No need for an accountant or certified accounts.

One tip: Nationwide simply averaged my two most recent years and took that as my annual income. Because you can choose to submit your tax return any time between April and January, which your two most recent years are depends on whether you’ve yet submitted your tax return for the year recently ended — so you have a little control here: submit your tax return early if it helps, and don’t if it doesn’t.

15th October 2018

Andre

Thanks Smylers.

This seems controversial. Some freelancers have told me they’ve had a similar experience to yours, while others said the bank insisted on certified accounts. In my case, all the banks I spoke to insisted on certified accounts and the honest truth is that it didn’t cross my mind to try and push back. Pushing back may have been successful, or it may not have. Definitely worth a try though.

Unfortunately, I didn’t go far with Nationwide. They refused to consider my llc’s retained profits, so I had to look elsewhere.

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