What self-employed people can do to improve their mortgage chances

When it comes to getting a mortgage, if you are self-employed, it can sometimes be more difficult to get a mortgage approved. One of the main criteria that is used to assess the affordability for a mortgage is income and a lender will require adequate proof of income from mortgage applicants.

For many people, this simply means that they provide 3-6 months of payslips from their employer. For self-employed people, it is not as straightforward, as you do not usually get payslips.

Historically, people used to be able to get self-certification mortgages, which basically enabled them to say how much they earn per year, without the requirement for any evidence.

However, these types of mortgages have been banned, as the UK mortgage industry now has much stricter regulations around the criteria that must be met to approve a mortgage. Lenders must have adequate evidence of an applicant’s income to ensure that people can afford the mortgage. 

As well as the amount of income an applicant earns, other factors will be taken into the affordability calculation, such as whether they have any outstanding debt and whether they have any adverse credit history.

How to prove income if you are self-employed

If you are self-employed, to prove your income you can provide the following:

• Two or more years’ certified accounts.
• SA302 forms or an HMRC tax year overview for the past 2/3 years.
• Evidence of contracts for upcoming work that has already been agreed.
• Evidence of dividend payments (if you are a director).

In addition to providing these documents, you will also usually be required to provide additional documents such as:

• Photo ID (passport or driving licence).
• A council tax or utility bill to your current address.
• Bank statements for six months.

The requirements from each lender can vary, for example, some will request to see two years of accounts, while others can ask for three to five years of accounts. Some lenders may want to see more than six months of bank statements, while other may just request three. Your mortgage broker will be able to tell you the exact requirements for the chosen lender before you submit the application, so that you can prepare the necessary documents in readiness.

How much can a self-employed person borrow?

The mortgage lender will review the income evidence that you provide to them, to calculate your affordability. As a general rule, people will normally be able to borrow around 4 times their annual income. You can see how much you can borrow using a self-employed mortgage calculator.

How to improve the chances of getting a self-employed mortgage

As well as ensuring that you have all of the required evidence listed above to prove your income, it is a good idea to check your credit record using a credit reference agency such as Equifax. If you have any recently missed payments, it might be better to wait until your recent credit history has improved, by paying off all your payments on time.

If you have any outstanding debt such as loans, credit cards or store cards, paying the outstanding balance will also help to improve your chance of getting a mortgage approved. The more outstanding debt you have, the less you are likely to be allowed to borrow. 

The lender will also take into account what your other outgoings are each month, such as groceries, bills, car loans or any other regular expenditure that you have. They will use this information provided in your bank statements to calculate how much disposable income you have each month. 

Being more careful with your spending in the six months leading up to applying for your mortgage can help to improve your chance of having a mortgage approved and also being able to borrow a higher amount.

Another way to help you to get a mortgage if you are self-employed is to use a specialist broker who can find you a lender that provides self-employed mortgages. With some mortgage lenders, self-employed workers will be approved for a mortgage but will be required to pay a higher interest rate.

However, when you use a broker who specialises in self-employed mortgages, they should be able to find you a mortgage deal where you do not have to pay a higher interest rate. You can also use comparison sites to find out the best mortgage deals for self-employed workers so that you do not end up paying a higher interest rate than you need to.