If you’re considering becoming self-employed or a contractor, or you already are, one of the things you may have been told at some point is that it’s harder to get a mortgage when you work for yourself but is this really true?
Employed vs self-employed
There is a difference between being employed and being self-employed or a contractor in the eyes of lenders. In a nutshell, when you’re employed there is a degree of certainty to your income stream, whereas when you’re self-employed, income can be more sporadic as you move between jobs or as business fluctuates.
Does being self-employed/a contractor hurt your chances of getting a mortgage?
In short, no. You simply have to demonstrate proof of income, like everyone else, and pass all of the usual credit and affordability checks. Lenders take lots of different things into account when choosing whether or not to offer you a mortgage, so you can still be in with a good chance of getting approved if you’re self-employed or a contractor. After all, your earning potential may actually be more than if you had an employer.
What do you need when applying for a mortgage?
3 years of accounts: This remains the same whether you’re a sole trader or limited company. A lender will look to see what your average income is by assessing net profit or share of net profit, salary and dividends where relevant.
Healthy credit score and report: Whether you’re employed or self-employed, lenders want to see that you have a good financial history and can properly manage your credit. Check your Noddle credit report to make sure your information is correct, all accounts are up-to-date, you’re on the electoral role and you don’t have a history of bad debt, such as missing payments. It pays to see what information all 3 credit reference agencies hold on you (Experian and Equifax are the other two credit reference agencies), as different lenders use different agencies.
Good deposit: The more money you can raise for a deposit, the less you have to borrow. This may also mean you can access better rates and it could take away some risk to the lender.
Affordability: Everybody has to pass affordability checks when applying for a mortgage. Lenders will want to see that you’re able to cover all of your monthly outgoings with your income and still have money left over if you have to pay a mortgage. If you’re self-employed or a contractor, be sure that you’re factoring in only things paid for by your personal funds and not those of your business/company.
Prepare, prepare, prepare
To increase your chances of being approved for a mortgage if you’re self-employed or a contractor, it helps to do as much research as you can beforehand. Find out more about what the process is likely to look like and speak to other self-employed professionals/contractors to see what their experiences of getting a mortgage have been. It may also pay to chat to an impartial mortgage advisor, who could help you get all of your ducks in a row before speaking to lenders.
If you’re self-employed or a contractor, the important thing is to remember that there are mortgage options out there for you.
Noddle is a credit broker and not a mortgage advisor or mortgage broker.