In today’s ever-changing economic world, the traditional pathways to homeownership have undergone a significant transformation. The rise of the self-employed workforce has brought about a fundamental shift in how individuals access and navigate the world of mortgages.
Now, more than ever, a growing number of aspiring homeowners are finding themselves in the unique position of seeking mortgage financing with just one year’s worth of accounts as proof of income. In the not-too-distant past, the newly self-employed found themselves almost entirely ruled out of the mortgage market, but now, more lenders, not just specialist ones, are considering their applications, with some even accepting one year’s trading history.
In this comprehensive guide, we will delve into the intricacies of mortgages for the self-employed, focusing on those with only a year’s accounts to present. Whether you’re a freelancer, sole proprietor, entrepreneur, or gig economy worker, this article aims to demystify the mortgage application process, provide essential insights, and empower you to make informed decisions on your path to achieving homeownership.
Join us as we navigate the dynamic landscape of mortgages for the self-employed, ensuring that one year’s accounts no longer stand as a barrier between you and the home of your dreams.
What is a Self-employed mortgage?
First things first, there is no such thing as a “self-employed mortgage”. Once approved for a mortgage, they will have access to all of the same lending products as any other individual. The main difference is in the way that lenders reach their decisions.
So, while there might not be such a thing as a self-employed mortgage, there is a unique application process for the self-employed. It’s often specialist lenders that will consider offering self-employed mortgages with one year’s accounts. Still, some high street lenders are starting to open up their products to self-employed borrowers.
The Changing Landscape of Mortgages
To understand why the self-employed face difficulties accessing lending, we have to look at the history of mortgages in the UK and worldwide. Before the 2007 credit crunch, lenders offered something called self-certified mortgages. These were ideal for the self-employed applicants as they allowed them to self-certify their earnings and then access lending based on their predictions of how much they would make in a year.
This led some applicants to inflate their projected income to access more money and purchase more significant properties. When they could not pay, these properties were repossessed, and the financial crisis ensued. Since the crash, lenders have required more financial history from their borrowers, particularly the self-employed. Lenders are legally obligated to be more stringent in their checks, so it has become more difficult for the self-employed to get a mortgage.
However, self-employed people can use other methods to prove their annual income or net profit. While many lenders might struggle to read between the lines, a specialist lender will consider your business income more carefully. Their goal is always to ensure that your monthly repayments are affordable. Still, self-employed individuals with a proven track record of business success should have no issues accessing a mortgage, thanks to new specialist lenders entering the market.
What Are the Eligibility Criteria for Self-Employed Mortgages?
The eligibility criteria for self-employed mortgages in the UK are similar to those in other countries, with some specific considerations related to the UK’s mortgage market. While each lender may have its specific requirements, here are some common eligibility criteria:
Proof of Income
A self-employed person will need to provide evidence of their income. This typically includes at least two to three years of filed self-assessment tax returns (SA302 forms) from HM Revenue and Customs (HMRC), but some lenders accept one year’s accounts; a longer history can improve your chances. If a qualified accountant prepares your accounts, this can improve your chances of securing a mortgage with one year’s accounts.
Accounts and Financial Statements
Lenders may require you to submit your business accounts, profit and loss statements, and balance sheets to assess the financial health of your business. These should be prepared by a qualified accountant ideally.
Credit History
Your personal credit file and credit score will be considered during the mortgage application process. A good credit score can improve your eligibility and mortgage terms. If you have a poor credit rating, this doesn’t have to mean the end of your journey. Poor credit might mean that you are offered higher interest rates. If your bad credit results from mistakes on your credit report, this should be addressed before applying for your self-employed mortgage.
Learn more: How Much Can I Borrow Mortgage Self-Employed?
Deposit
You will typically need to provide a minimum deposit of 5% for the property you intend to purchase. The deposit size can vary, but a larger deposit can often result in more favourable mortgage rates.
Affordability Assessment
Lenders will assess affordability to ensure you can comfortably afford the mortgage payments. This assessment considers your income, expenses, and any existing debts.
Type of Self-Employment
Lenders may have different criteria depending on the type of self-employment. For example, sole traders, company directors, freelancers, and partners in a business may have slightly different documentation requirements.
Mortgage Type
The eligibility criteria can also vary depending on the type of mortgage you’re applying for (e.g., interest-only or repayment).
It’s important to note that eligibility criteria can differ significantly between lenders, so shopping around and comparing mortgage offers from different lenders is advisable. Additionally, seeking the advice of a mortgage broker specialising in self-employed mortgages can be beneficial, as they can help you find lenders who are more likely to approve your application based on your unique financial situation.
Is it Harder to Get a Mortgage With Just One Year’s Accounts?
While it can be more challenging to get a mortgage with just one year’s accounts, it’s not impossible. Some lenders are open to considering applications with a shorter trading history.
If you are purchasing a property in the first year of self-employment, we have a few recommendations to help improve your chances of being accepted:
Work with a chartered accountant to prepare your finalised accounts. This will reassure the lender, even if you haven’t been trading for long enough to submit your first tax return yet. Usually, only company directors will work with an accountant, but a sole trader can benefit from this.
Increase your deposit amount. Boosting your deposit will reduce the amount of lending you need to access, and this can make the application process more manageable.
Wait it out. If you aren’t in a hurry to get on the property ladder, you might consider waiting until you have more than one year’s accounts before applying. This can simplify the process and allow you to access more mortgage products.
Work with a specialist mortgage broker. Expert mortgage brokers can refine your application to make it attractive to lenders. They may also put you in contact with highly specialist lenders that offer bespoke lending products not available from high street lenders.
What do Mortgage Lenders Look For in Applicants?
When mortgage lenders in the UK assess mortgage applications, they consider various factors to determine the applicant’s eligibility and risk level. Here are the key factors that mortgage lenders look for in applicants:
Income and Employment Status: Lenders assess your income to determine your ability to make mortgage payments. They look at your employment status, such as whether you are employed, self-employed, or have a contract job. Stable employment and a reliable source of income are often preferred.
Credit History: Your credit history significantly affects the mortgage approval process. Lenders will review your credit report and credit score to assess your creditworthiness. A good credit history demonstrates your ability to manage debt responsibly.
Affordability: Lenders use affordability assessments to determine whether you can afford the mortgage payments. This involves considering your income, expenses, and existing debts. They typically use income multiples or an affordability calculator to gauge your ability to repay the mortgage.
Deposit: The size of your deposit is crucial. Generally, lenders see a larger deposit as a positive sign, as it reduces the loan-to-value (LTV) ratio and the risk they are taking.
Loan-to-Value (LTV) Ratio: Lenders calculate the LTV ratio, which is the loan amount compared to the property’s value. Lower LTV ratios (e.g., 80% or less) are often associated with more favourable mortgage terms, indicating a lower risk for the lender.
Type of Property: The property you intend to purchase can impact your eligibility. Some lenders have specific criteria for certain property types, such as new builds or flats in leasehold properties.
Age and Term of the Mortgage: Lenders consider your age and the term (length) of the mortgage. Some lenders have age restrictions and may limit the mortgage time based on your age at the end of the term.
Credit Commitments: Lenders will review your financial commitments, such as credit cards, loans, and other debts. These commitments can affect your affordability and the amount you can borrow.
Stability and Residency: Lenders may require proof of stability and residency, including your address history, to verify your identity and assess your steadiness as a borrower.
Financial Conduct: Your economic behaviour, including any history of missed payments or defaults, can impact your eligibility.
All these factors are things you can work on and improve before submitting your self-employed mortgage application. Working with a specialist mortgage broker will improve your chances of success.
Use Our Self-Employed Mortgage Calculator
If you’re wondering how much you can borrow, our self-employed mortgage calculator can help. And if you’re ready to start the application process, get in touch to learn more about the specialist mortgage brokers we work with. Even if you only have 1 year’s accounts, we can help connect you with specialist lenders. Self-employed people don’t have to feel like they cannot get a mortgage.
About Us
At Jones & Young, we are here to help you secure the mortgage you deserve. We provide tailored advice to create long-term success and financial progression for our clients.
As specialist mortgage brokers, we can assist you with a wide range of mortgage advice from CIS Mortgages, Self Employed Mortgages, Contractor Mortgages, Later Life Mortgages and Mortgages for Company Directors. Let us at Jones & Young guide you to the right specialist mortgage lenders.
Speak to our team of specialist mortgage brokers today.
FAQs
Let’s answer some of your most frequently asked questions about mortgages.
Can You Get A Mortgage With 1 Year Self-Employed?
Securing a mortgage while being self-employed for just a year is indeed plausible. While being self-employed and seeking a mortgage may historically have presented more hurdles, the contemporary lending landscape is more accommodating. Several lenders now provide mortgage options for the self-employed, even those with a single year of accounts. The key is substantiating your income through pertinent documentation, which may suffice for some lenders to consider your application.
Are Self-Employed Mortgages Hard to Get?
Securing a mortgage while self-employed may have a few more steps, but it’s far from an insurmountable challenge. The crucial aspect is illustrating a dependable income stream to lenders, which can be achieved in many ways. It may involve additional paperwork, but a mortgage is certainly attainable with the proper preparation and proof of stable income.
Do You Have to Be Self-Employed for 3 Years to Get a Mortgage?
While it’s commonplace for lenders to request two to three years of accounts alongside three months’ bank statements for self-employed individuals seeking a mortgage, it’s not a universal requirement. The stipulations can vary significantly between lenders; some may accept your business accounts or require an accountant’s reference, while others might have different criteria. Navigating the lending market might uncover options that accommodate varying durations of self-employment, aligning with your circumstances.
How Many Months Bank Statements Do I Need for Self-Employed Mortgage?
For a self-employed mortgage, lenders typically request between one and three years of accounts to gain a comprehensive understanding of your financial stability and reliability. However, in terms of bank statements, it’s standard for lenders to ask for the last three to six months as a minimum. These bank statements should ideally reflect a healthy, stable income and responsible financial management.
