If you’re self-employed and looking to buy a home, you may find it challenging to secure a mortgage. However, being self-employed doesn’t necessarily mean you can’t get a mortgage. In fact, many lenders and banks accept applications from self-employed workers.
While getting a self-employed mortgage may require more paperwork and documentation than a regular mortgage, it’s still possible to get approved. Lenders will typically look at your income, credit score, and other financial factors to determine whether you’re eligible for a mortgage.
It’s important to understand the requirements for a self-employed mortgage and how to improve your chances of getting approved. In this article, we’ll explore what you need to know about self-employed mortgages in the UK, including the application process, eligibility criteria, and tips for improving your chances of getting approved.
What Are Self Employed Mortgages?
Self-employed mortgages are home loans that are specifically designed for individuals who work for themselves or own their own businesses. These types of mortgages are different from traditional mortgages because self-employed individuals typically have more complex financial situations and may not have the same level of financial stability as those who are employed by a company.
When applying for a self-employed mortgage, lenders will typically require more documentation than they would for a traditional mortgage. This is because self-employed individuals may not have a steady income or may have irregular cash flow. As a result, lenders will want to see evidence of consistent income over a period of time, typically two years or more.
Self-employed mortgages can be more difficult to obtain than traditional mortgages, but there are steps that individuals can take to improve their chances of being approved. For example, it may be helpful to work with a lender who specializes in self-employed mortgages or to explore alternative lenders who have experience working with self-employed individuals.
Eligibility Criteria
Income Requirements
When applying for a self-employed mortgage in the UK, lenders will typically require at least two years of accounts and bank statements. You will need to provide evidence of a regular income, which can be demonstrated through your accounts and bank statements. If you are a contractor, you may need to provide evidence of upcoming contracts.
It’s important to note that lenders will not just look at your income, but also your expenses. They will want to ensure that you can afford the mortgage repayments, so they will take into account your outgoings, such as rent, bills, and other debts.
Credit Score
Your credit score is an important factor when applying for any type of mortgage. It is a measure of your creditworthiness and is based on your credit history. Lenders will use your credit score to assess the level of risk involved in lending to you.
If you have a good credit score, you are more likely to be approved for a mortgage and may be offered more favourable terms, such as a lower interest rate. However, if you have a poor credit score, you may struggle to get approved or may be offered less favourable terms.
It’s important to check your credit score before applying for a mortgage. You can do this for free with several credit reference agencies in the UK, such as Experian, Equifax, and TransUnion. If you have a poor credit score, there are steps you can take to improve it, such as paying off debts and ensuring that you are on the electoral roll.
Types of Self Employed Mortgages
Fixed Rate Mortgages
A fixed rate mortgage is a type of mortgage where the interest rate remains the same for a set period of time. This means that your monthly repayments will remain the same during this period, which can be reassuring for self-employed borrowers who may have fluctuating income. Fixed rate mortgages are available for a range of terms, typically between two and ten years.
Tracker Mortgages
A tracker mortgage is a type of mortgage where the interest rate is linked to the Bank of England base rate. This means that your monthly repayments will go up and down in line with changes to the base rate. Tracker mortgages can be a good option for self-employed borrowers who are confident that they can afford to make higher repayments if interest rates rise.
Discount Mortgages
A discount mortgage is a type of mortgage where the interest rate is set at a discount to the lender’s standard variable rate (SVR) for a set period of time. This means that your monthly repayments will be lower than they would be on the lender’s SVR. Discount mortgages can be a good option for self-employed borrowers who are looking to keep their monthly repayments low in the short term.
It’s important to note that the interest rates on self-employed mortgages can be higher than those on mortgages for employed borrowers. This is because self-employed borrowers are seen as higher risk by lenders, as their income can be less predictable than that of employed borrowers. However, by providing evidence of a regular income and good credit history, self-employed borrowers can improve their chances of being approved for a mortgage at a competitive rate.
How to Apply for a Self Employed Mortgage
Documents Required
When applying for a self-employed mortgage, you will need to provide specific documents to the lender. These documents include:
- ID, such as a passport
- Proof of address
- Bank details
- Two years’ evidence of a regular income and account statements
Be sure to have all of these documents ready before applying for a self-employed mortgage.
Finding the Right Lender
Not all lenders offer self-employed mortgages, so it’s important to find the right lender for your needs. Look for lenders that specialize in providing mortgages to self-employed individuals. You can also use mortgage comparison websites to find lenders that offer self-employed mortgages.
Application Process
The application process for a self-employed mortgage is similar to that of a regular mortgage. You will need to provide the lender with all the necessary documents and information about your income and expenses. The lender will then assess your application and determine whether you are eligible for a mortgage.
Use mortgage calculators to determine how much you can afford to borrow and get an Agreement in Principle to see if the lender can lend you the amount you need. Once you have found the right lender and completed the application process, you will be on your way to getting a mortgage as a self-employed individual.
Tips for Getting Approved
When it comes to getting approved for a self-employed mortgage, there are several things you can do to increase your chances of success. Here are some tips to consider:
Boost Your Credit Score
Your credit score plays a crucial role in the mortgage approval process. It’s important to check your credit report regularly and take steps to improve your score if necessary. This could include paying off any outstanding debts, making all your payments on time, and avoiding new credit applications.
Save for a Larger Deposit
The larger your deposit, the more likely you are to get approved for a mortgage. This is because a larger deposit reduces the lender’s risk, and shows that you are financially responsible. Consider saving as much as you can towards your deposit, and try to aim for at least 20% of the property’s value.
Reduce Your Debt
Having too much debt can negatively impact your chances of getting approved for a mortgage. Lenders will look at your debt-to-income ratio, which is the amount of debt you have compared to your income. If your ratio is too high, it may be difficult to get approved. Consider paying off any outstanding debts, and avoid taking on new debt before applying for a mortgage.
By following these tips, you can increase your chances of getting approved for a self-employed mortgage in the UK. Remember to do your research, compare different lenders and mortgage products, and seek professional advice if necessary.