self employed mortgage

Getting a mortgage as a self-employed person isn’t all that different from getting one as an employee. You have the same mortgage options and lenders as someone who is employed. You simply need to supply different information about your salary to a traditional mortgage lender so they can assess how much you can borrow. Getting a mortgage as a self employed has its own drawbacks though. But in this article, you’ll find a guide to getting a mortgage while self employed with the help of a broker.

Limitations to Getting a Mortgage While Self-Employed 

Self-employed people aren’t always seen as ideal borrowers by lenders. Employees can be particularly creditworthy because of their consistent, easily verifiable incomes, especially if their credit scores are excellent. As opposed to traditional employees who can submit a W-2, self-employed borrowers will have to furnish additional documents to document income.

Another issue that self-employed borrowers have is that they frequently use company expenses to decrease taxable income on tax returns, leading lenders to question whether the borrower earns enough money to buy a home. Finally, banks may prefer a lower loan-to-value (LTV) ratio, which means the borrower will have to put down a greater deposit.

To qualify for mortgages and other loans, many lenders are seeking higher credit scores, greater down payments, and more documentation. This is true for all borrowers, not only self-employed people, and the requirements differ per lender.

Getting a Mortgage while Self Employed

Borrowers who are confident in their ability to pay can undertake any or all of the following to increase their chances of getting a loan:

#1. Create a track record of self-employment.

Lenders will be more ready to take a chance on you if you can demonstrate that you know how to win at self-employment. You should have at least two years of experience working for yourself. 1 The longer the period, the better, as it demonstrates that your revenue is consistent.

#2. Increase your credit score as much as possible.

A higher credit score will make a borrower more appealing to obtain a loan in the first place and qualify for cheaper interest rates in any type of borrowing situation.

#3. Make a substantial down payment.

The bigger the equity in a home, the less probable it is that a borrower will default on the loan during a financial crisis. If a borrower invests a large sum of money in the purchase up front, the bank will view them as a lower risk.

#4. Have a sizable cash reserve

In addition to a high down payment, having a large emergency reserve informs lenders that the borrower will be able to make monthly payments even if the firm suffers a setback.

#5. Pay off all credit card debt.

The easier it will be for you to meet your mortgage payments if you have fewer monthly debt payments entering into the mortgage procedure. Because you’ll have more cash flow if you pay off your credit cards and car loans, you could be able to get a bigger loan.

#6. Submit documents

Having the willingness and ability to fully record your income through past years’ tax returns, profit and loss statements, balance sheets, and other financial documents will improve your chances of qualifying for a loan. Some or all of the following may be requested by your lender:

  • List of debts and payments due each month
  • Statements of account
  • Assets’ list (savings accounts, investment accounts, etc.)
  • sources of additional income (alimony, Social Security, etc.)
  • Proof of your business or employment (business licence, client letters, accountant statements, etc.)
  • A copy of your most recent rent or mortgage payment

Mortgage Options for Self-Employed People

If you’re self-employed and don’t qualify for a traditional mortgage, certain lenders may still be able to help. Because conventional mortgages are not backed by the government, they have more stringent lending requirements. Here are a few more possibilities:

#1. FHA-insured mortgage

A Federal Housing Administration (FHA) loan is a mortgage that is guaranteed by the FHA and offered by a lender that has been approved by the agency. Low-to-moderate-income borrowers are eligible for FHA loans. They have a lower minimum down payment—as low as 3.5 percent—and credit score requirements than many traditional loans.

Because FHA loans are federally guaranteed, lenders are covered in the event that a borrower defaults on their mortgage. As a result, borrowers who might not otherwise qualify for a house loan can take advantage of more advantageous terms, such as reduced interest rates. This also means that qualifying for an FHA loan is easier than qualifying for a conventional loan. 

#2. Loan from a bank statement

Bank statement loans, also known as alternative document loans, allow borrowers to qualify for a loan without having to provide typical proof-of-income paperwork like tax returns and W-2s. Instead, lenders examine your bank statements for the last 12 to 24 months to determine your business income. If you don’t have income tax records or other ways to verify your income, this type of loan may be a good option.

Bank statement loans have higher interest rates because the lender is taking on more risk.

#3. Mortgage that is held jointly

If you are self-employed, getting a combined mortgage with a W-2 co-borrower, such as a significant other, spouse, or trusted friend, is another approach to boost your chances of getting accepted for a mortgage. This assures your lender that you will be able to repay the debt on a consistent basis.

#4. Enlist the help of a co-signer.

Finally, you might be able to get a parent or other relative to cosign your mortgage loan. Remember that this individual must be willing and capable of taking full responsibility for the debt if you default.

Mortgage Requirements for Self-Employed People

Before you may qualify for a home loan, most mortgage lenders require at least two years of consistent self–employment. Lenders define “self–employed” as a borrower with a 25% or greater ownership interest in a firm or who is not a W–2 employee.

The two–year norm, however, has several exceptions.

If you have a two–year track record in a related field of business, you may be able to qualify with just one year of self–employment. In comparison to the W2 position, you’ll need to show that your new job pays the same or more.

Some lenders will accept a job history that includes one year of related experience plus one year of formal schooling or training.

You won’t be able to get a home loan if you’ve been self–employed for less than a year.

Why you need a Mortgage Broker if You are Self Employed

When you’re right at the beginning of the home buying process, it’s quite probable you’ll have a whole host of questions swimming around in your head wanting answers, such as: 

  • What is the maximum amount of money I can borrow?
  • Which lenders are going to take a look at my application?
  • What proof of my earnings do I require?
  • How do I get a mortgage if I’m self-employed?
  • What happens if I have a poor credit history?

There are two paths you can take to discover answers to all of your questions:

  • Do it on your own (the hard and time-consuming route)
  • Consult a seasoned mortgage broker (the smart and quickest route)

If you’re self-employed, attempting to get the best mortgage on your own will cost you the one commodity that is critical to the success of your business: time!

What are the Benefits of working with a Mortgage Broker when Self Employed?

Here are two crucial areas where a mortgage broker may help you save money, especially if you’re self employed.

#1. Getting your proof of income together

A lender can request copies of monthly payslips, employment contracts, and P60s from salaried employees, all of which would be considered acceptable proof of income. However, if you’re self-employed, things are a little more complicated because you won’t have any of these documents.

So, how will you demonstrate that you can afford your mortgage payments? If you’re self-employed, here’s a table that summarises how your income will be assessed and the supporting information you can use.

Self-employment statusAffordability Assessment based on:Proof of Income required:Business Bank Statements required (typically 3-6 months):
Sole TraderNet profitsCertified accountsSA302 statements from HMRCORTax year overviewYes
PartnershipEach partner’s percentage share of the net profitsCertified accountsSA302 statements from HMRCORTax year overviewYes
Limited Company DirectorSalary plus dividend incomeORSalary and retained profitsCertified business accountsSA302 statements from HMRCORTax year overviewAccountants referenceYes

As you can see, a lender’s evaluation of a self-employed applicant differs significantly from that of an employee. You’ll have a better chance of succeeding if you can offer more evidence.

It’s easy to become overwhelmed by all of the information here, but don’t be! This isn’t something you’ll have to do on your own. An expert broker will already know what evidence is required and can assist you in gathering it.

#2. Locating a suitable lender

It’s a common misconception that all mortgage lenders follow the same set of rules, but this isn’t the case. They all follow the same set of rules, but their eligibility requirements differ from one lender to the next.

This means that what one lender may accept may not be accepted by another.

Rather than approaching each lender directly, you can use a mortgage broker’s knowledge and experience to find the best lender for your needs. This will save you a lot of time, effort, and possibly money.

How do I Find a Good Mortgage broker?

There are a number of ways that having the right mortgage broker on your side can benefit you if you’re self employed. They include:

  • Size of your deposit: Finding lenders who will look at your application based on how much a deposit you have available.
  • How much you can borrow: Assisting you in preparing your proof of income in order to obtain the mortgage you require.
  • Bad credit history: Providing guidance on how to improve your credit score and locating specialised lenders who will take your application into consideration.
  • There is no proof of earnings or trading history: Can assist in the preparation of further evidence and the identification of a specialised lender.
  • Contractors and small company owners: Can demonstrate how to prepare your proof of income in order to strengthen your application.

In Conclusion,

In the absence of unemployment insurance payments, a W-2 employee’s income will plummet to zero in the blink of an eye if they lose their job. Self-employed people frequently have several clients and are unlikely to lose all of them at once, providing them with more job security than is commonly assumed.

Self-employed people are used to working extra hours to complete more tax forms, obtain company permits, find new clients, and keep their businesses going. They can also find ways to qualify for a mortgage with a little research and perseverance.

Self Employed Mortgage FAQs

How many years do you have to be self employed to get a mortgage?

In order to examine a self-employed application and determine their potential to make timely repayments on your mortgage, most lenders require at least two years’ worth of accounts – including income, expenses, and operational costs.

Are mortgage rates higher for self employed?

A self-employed person’s mortgage interest rate may be the same as or even lower than that of a regularly employed person. Your credit score, the amount you put down, and the length of the mortgage are all factors that influence interest rates.

Is it hard to get a mortgage self employed?

If you’re self-employed, getting a mortgage can be more difficult because you’ll need to show that you have a steady income. However, getting a mortgage as a self-employed person is far from impossible.

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A self-employed person's mortgage interest rate may be the same as or even lower than that of a regularly employed person. Your credit score, the amount you put down, and the length of the mortgage are all factors that influence interest rates.

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If you're self-employed, getting a mortgage can be more difficult because you'll need to show that you have a steady income. However, getting a mortgage as a self-employed person is far from impossible.

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