Hand holding house

Getting a credit card is hard enough when you’re self employed but getting a mortgage seems to mean endless hurdles that get you nowhere.

But is it actually harder to get a mortgage when you’re self employed?

And are there things you could do that could improve your chances?

I got a handful of experts from the mortgage world to answer some of the pertinent mortgage questions for self employed workers.

Is the affordability criteria more strict for self employed workers?

Applying for a mortgage when you’re self employed seems so much harder than if you’re on a PAYE contract, but the experts say it’s not because there are stricter rules.

Instead, it’s how your income is assessed that makes all the difference.

Graham Cox, director of Self Employed Mortgage Hub, explained: “In terms of outgoings, self-employed and employed applicants are treated identically. What’s different is how income is assessed. 

“Limited company directors’ income is usually based on salary and dividends, averaged over the past two years, or using just the latest year’s finalised accounts, if the previous year was better.

“There are one or two lenders who will consider net profit after tax, instead of salary/dividends, which might allow higher borrowing. 

“For sole traders, lenders will use net profit (pre-tax) in the most recently completed tax year. This is based on your SA302 tax calculation [available from HMRC after you file your tax return], Tax Year Overview and business accounts.

“Likewise, if you’re a LLP equity partner, your share of net profit will be used. 

“Meanwhile, contractors’ income is usually determined as 46 weeks x day rate x number of days a week worked, as long as the contract stipulates at least 230 days a year work.”

How can self employed workers improve their chances of securing a mortgage? 

“For many, it’s about trying to build the consistency of the income coming in, having good account management and keeping your bank statements (both business and personal) in good order (trying to avoid regularly going overdrawn for example),” according to Dan Smalley, managing director of Rippled Mortgages

Maximising your profits in the lead up to your mortgage application could also help.

Cox explained: “Talk to your accountant well in advance of applying, so he or she can maximise your earnings for the tax year. While you’ll pay a bit more in tax, the increased income will allow you to borrow more. 

“Of course, if your earnings are already sufficient to borrow what you want, you don’t need to worry. But either way, you’ll want to have your accounts finalised and submitted early so you’re ready to apply.”

Cox also recommends looking at other regular commitments and seeing if you can reduce these.

He said: “Some you won’t be able to do anything about, like child maintenance or spousal support, but others, like credit commitments, are a biggie.  

“If you can, clear any outstanding credit card balances or personal loans. And avoid getting tied into large car finance payments for years on end. They are like a mortgage payment in themselves, and when assessing affordability, lenders see them as much.” 

And in the months before you submit your application, check your credit report, says Cox. “That way, if there are any issues that need addressing, you have time to fix them. 

“A common issue that can have a detrimental effect on your mortgage application is if you’re not showing up on the electoral roll on one or more of the credit reference agencies. 

“We recommend Check My File, because you can view data for four credit reference agencies: Experian*, Equifax, TransUnion and Crediva.”

Is it easier to secure a mortgage if you’ve been freelance for longer? 

It’s all very well if you’re a veteran in the freelancing business but what if you’re fresh to the world of working for yourself?

It’s not a deal breaker according to Sara Barker, director at Elmbank Mortgages.

She explained: “If you have previous experience in the same industry, some lenders will be OK with just one year’s accounts. And if you’re on a contract basis, some lenders will use the contract.”

Joanne Leek, marketing manager at Suffolk Building Society, agrees. 

She added: “It does help having a consistent track record of earnings, but for people with fewer than two years’ accounts, some lenders may be able to consider them if they have previous employment in a similar role.”

How do lenders assess affordability if part of your income is from PAYE? 

Another facet of freelancing is that you might have income from lots of different sources, including as PAYE if you also have a part time job.

That’ll all be taken into consideration according to Smalley.

He said: “If you have multiple streams of income, a lender can consider these. For example, the main employed role and a ‘side hustle’. 

“The lender will want to check the ongoing sustainability of having two forms of work. Some may even take a reduced percentage of the second income, but this could help boost your affordability in combination. 

“In terms of assessment, they would look at both payslips and tax returns to ratify these figures.”

Other forms of income may also be accepted by lenders according to Leek.

She said: “Most lenders are able to consider multiple forms of income, whether that comes from self employment and/or employment, plus things like investment, rental and pension income. 

“It can be worth seeking an independent mortgage advisor who will know the ins and outs of various lenders’ criteria, and will be best placed to help the applicant find a willing lender.”

What about if part of your income is on a zero hour contract? 

It might be worth going to a smaller lender if you’re not going through a mortgage broker in this case.

Leek explained: “Some lenders, especially smaller building societies, consider applications using a manual underwriting process. 

“This means an expert assesses each case individually, so this type of lender is often able to consider multiple or less ‘mainstream’ income sources, including zero hour contracts.

“Applicants will require a minimum period of zero hours employment for it to be considered income for a mortgage, typically up to 2 years’ history (lenders will check this using P60s and payslips).”

However, it may well depend on whether you’ve been in the industry before.

Nicola Arbon, managing director of The Mortgage Hut, said: “Most lenders will want to see a two year history of this so they can confirm it is sustainable; some lenders will allow 12 months on a zero hour contract if you were doing a similar job previously.”

What are some of the major red flags for lenders? 

Aside from the issues that would affect any mortgage application, self employed workers will need to watch for fluctuations in their income as well.

Cox explained: “A large fall in profits / income in the most recent year is a major red flat. The lender will often seek an explanation to satisfy themselves that your business is on a solid footing. 

“Similarly, if there is a big jump in profits, the mortgage provider will want to know if it’s sustainable or as a result of one-off factors. 

“Other than that, it comes down to your outgoings and credit score.”

Any other tips? 

Having a good accountant and a good broker can be a good place to start – but do this well in advance of your application so you can get all your finances and documents in order. 

If you do have anything that might affect your mortgage application, be prepared to have an explanation.

Leek added: “It’s important to be completely honest and upfront at the start of the application, especially if your income is more complex than the traditional employed applicant. 

“This means providing the full picture, especially if there have been fluctuations in income, changes to company structure, or even if there are multiple streams of income that need to be considered – if a lender is presented with the full story upfront they can make an informed decision early.

“As mentioned above, anyone who has a more complex application may be best to seek the advice of a mortgage intermediary who can select a mortgage provider who is more likely to consider the applicant and can advise on which lenders offer manual underwriting.”