Is it harder to get a mortgage if you're self-employed?

Navigating the path to homeownership is a milestone many of us aspire to, but this path can seem a little more complicated if you're self-employed. The question often arises: Is it harder to get a mortgage if you're self-employed in the UK? The answer, in short, is yes - it can be, but it's certainly not an insurmountable challenge.

Understanding the Challenges

The issues that often make the process more complicated for self-employed individuals boil down to income verification, income stability, the amount of the deposit, and credit score. Let's take a deeper look at these aspects:

Income Verification

For salaried employees, verifying income is as simple as presenting a few months of payslips. However, if you're self-employed, lenders typically require at least two, often three years of accounts or tax returns. This not only confirms your income but also demonstrates the sustainability of your business.

Income Stability

One of the major factors that lenders consider is income stability. A consistent monthly income is easier for them to assess. As a self-employed person, your income may fluctuate, which might concern lenders as it presents a risk that you might not be able to meet your monthly payments if your income dips.

Higher Deposit

Sometimes, lenders may require a higher deposit from self-employed borrowers. This is another way for lenders to offset the perceived risk. A higher deposit means you're borrowing less, which can make the lender more confident about your ability to repay the loan.

Credit Score

A good credit score is always important when applying for a mortgage, but it can carry extra weight when you're self-employed. Lenders may feel more comfortable granting a mortgage to a self-employed individual with a strong credit history.

Tips to Improve Your Chances

While these challenges might seem daunting, there are ways to improve your chances of securing a mortgage as a self-employed individual:

Maintain a good credit score

Regularly check your credit score and ensure you're in good standing. Pay your bills on time, don't max out your credit, and address any errors on your credit report promptly.

Save for a larger deposit

While this may not always be possible, a larger deposit can make your application more appealing to lenders. This is due to being deemed as less of a risk than an applicant with the bare minimum as a deposit. A larger deposit is a vague and often unhelpful term, but 25% or more of the property value is considered a large deposit.

Keep detailed and up-to-date business records

The more organised and accurate your business accounts are, the easier it will be to prove your income. Hiring a certified or chartered accountant can be a valuable investment in this regard.

Limit your use of business expenses

This is a careful balancing act because while claiming expenses can reduce your taxable income, it also reduces the income you can show for your mortgage application.

Seek professional advice

Financial advisers can offer reliable and widely-trusted advice when it comes to obtaining mortgage advice. There is plenty of advice online, much of it valuable. However, we’d always recommend seeking the support of a professional when making significant financial decisions.

Final thoughts

Obtaining a mortgage when you're self-employed in the UK might involve a few more hurdles, but with a well-prepared application and financial strategy, these can be navigated successfully. Remember, every lender has different criteria, so it's important to do your research or work with a professional who can guide you through this process. Homeownership can be within your reach, even if you're self-employed.

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

Approved by In Partnership FRN 192638 July 2023