Getting a Mortgage When You Are Self-Employed

Buying a house used to be something that everybody wanted to do. It would ensure long-term financial stability and give you something to leave behind. Owning your own home gave you security. And, luckily, it wasn’t that hard to do. With a few years of solid saving, you could have a decent deposit, and most workers had no trouble getting a mortgage.

Then, everything changed. House prices skyrocketed, meaning you needed a much bigger deposit, and to borrow a lot more from the bank. At the same time, banks became much more reluctant to lend. Only 38% of young people today own their home, with most of the rest either stuck long-term renting or living at home with their parents for much longer while they try to save for a deposit.

Yes, buying a home may still be something we all want to do, but for many, it can seem like more of a pipedream than something that they can actually achieve. These prospective home buyers are very aware that the deposit isn’t their only cost, as the other associated costs of buying a home and things like insurance and tax are increasing. While this handy home rebuild calculator can help, many young people can’t even imagine getting this far.

Things can get even more complicated if you are self-employed. As many bloggers or freelance workers are. More of our workforce is now becoming self-employed, seeking more flexibility and opportunity. But, the real estate market doesn’t reflect this. The self-employed workforce, even when earning well and securing a large deposit can struggle to get approved for a mortgage. Banks want assurances. Employment and contracts offer them this. As a self-employed person, you have no guaranteed income; you are asking the bank to take a much larger risk in their eyes. Which may not seem entirely fair, as an employee could lose their job any second and have absolutely nothing to fall back on. Self-employed people obviously have the skills they need to make money for themselves, without being affected by staff cutbacks or companies going out of business.

While attitudes to lending sole-traders and self-employed individuals may change in the future, for now, you may need to explore some of these options.

Save

The very best way to buy your own home will always be to avoid a mortgage completely and buy it outright straight away. A quick look at the housing market might suggest the impossibility of this, but it doesn’t have to be. If you are newly self-employed, the main reason that you could struggle is that you aren’t able to provide enough tax history. So, take a look at your deposit, could this be enough to buy a house, perhaps out of town, or smaller than you’d ideally like? Live here for a few years, saving up while you aren’t paying rent or a mortgage while also building up further earning records.

Then, when you are in a better position, sell and move up the housing ladder. If this isn’t possible, at least try to save the biggest deposit you can.

Shared Ownership

Another fantastic option is buying a shared ownership home. You may be able to buy the first 25% outright, without the need for a mortgage at all. Then, rent the rest while you save a deposit to buy the rest. You can often buy in 10% shares, called stair casing. So, you’ll only ever need manageable deposits and small mortgages that you are more likely to be approved for.

Ask for Help

If you need to boost your deposit, it can be a good idea to ask your parents for a loan. If they are able, this will give you a great start. Another option, if this isn’t possible is applying for a guarantor mortgage. If your parents own their own home, still work and have a good income, they could sign on as a guarantor. They’ll usually have to stay on your agreement until you’ve paid off a certain amount of your loan, normally up to 80%. If you fail to make payments for any reason, your guarantor is responsible. But, if you make all of your payments on time, it won’t affect them.

Don’t

If you are buying with a partner, it might be a good idea to take out a mortgage in their name only, instead of making a joint application. If they’ve got a good income, a stable job and a decent credit score, you may find the mortgage they are offered as a single applicant is more than what you could get as a couple. This will very much depend on your situation but is often worth looking into. Remember, just because you’re not on the mortgage, doesn’t mean that your name can’t be on the deeds to the house. You will also have the option to re-mortgage as a couple later on if you’d like to.

Wait

Most lenders ask for two years’ worth of tax returns from self-employed people. So, ideally, you need two full tax years of earning well before you apply. If it takes you awhile to establish your business and start turning over a good profit, it’s a good idea to wait. If you are living in a rental, you like, and coping financially, use this as a chance to save, earn more and improve your credit score before you apply.

Stop Claiming Expenses

When you are self-employed, usually, you want to claim as many tax deductibles as you can. You’ll use apps and spreadsheets to make this easier and help cut your tax bill as much as possible. This can save you a huge amount of money. But, not claiming these expenses will raise the number on your SA302 form earnings. You’ll pay more tax but have a better chance of getting a mortgage.

Sort Your Credit Score

When it comes to improving your credit score, the first thing that you should do is check it. Find out where you stand. Then, do everything you can to improve it but registering on the electoral roll if you haven’t already, reducing credit applications, paying off debts and making sure you pay all your bills on time.

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