Sole trader mortgage guide: how freelancers can get a home loan
Mortgages for sole traders should, in theory and in practice, be relatively straightforward.
But for any one of several reasons, it doesn’t play out like that in the real world.
The two big mortgage stumbling blocks
The two most common reasons are because the freelancer or sole tradesperson has either 1) applied to an unsuitable lender, or 2) the adviser didn’t package their application so that it highlights their true affordability to underwriters.
In this guide, exclusively for FreelanceUK, we hope to bring some clarity to the sole trader mortgage process, writes John Yerou of Freelancer Financials..
Get lenders to see your self-employed income in a positive light...
We’ll look at how mortgages for self-employed people work and how to secure a competitive home loan as a freelancer; We’ll also look at the often-missed critical step of working with an experienced mortgage broker, one who understands both self-employed freelancers and underwriters.
Follow the other tips towards the end of this article on getting a mortgage as a sole trader, and then, if you really stick to the process, a lender should see your self-employed income in a positive light.
How to get a mortgage as a sole trader
There’s still a stigma around how difficult sole traders find securing a competitive mortgage offer. That’s despite the vast majority of lenders now accepting sole traders and their income, including accepting freelancer applicants.
Ultimately, only one thing is an absolute must if you want to get a mortgage as a sole trader. And it’s this -- prepare your finances to satisfactorily evidence your income. If you abide by this golden rule, then getting a mortgage can be as easy for sole trader borrowers as it is for the traditionally employed.
Do you need to be self-employed for three years to get a mortgage?
No, not at all. Most lenders want to see a minimum of two years' trading history. But some lenders now accept 12 months’ trading history as sufficient evidence.
Still not short enough for you? Well, it’s worth talking to us if your income history is on the shorter side. Our experienced brokers can align you with a lender amenable to self-employed applicants with smaller track records.
Conversely, contractors on fixed-term contracts and CIS workers can get a mortgage with less than 12 months' trading history. Again, different lenders assess risk differently, so do reach out to us for the very latest before approaching them.
Can you get a mortgage after just six months' self-employment?
The only way you’ll get a mortgage with six months’ trading history is if:
- you’re a fixed-term contractor, and
- you’ve worked in the same field of work for a minimum of 12 months.
How lenders assess self-employed earnings for affordability purposes
Mortgage underwriters assess all sole traders’ affordability against their annual taxable earnings.
Most will ask for copies of your latest SA302 tax calculation and tax year overview. Once they have those, they can work out what they’re willing to lend you.
Your SA302 will show the lender two things:
- your current taxable earnings from your profession, and
- ALL income and gains from other taxable sources.
You can request your SA302 documents directly from your accountant or online from HMRC.
Some lenders may also ask for signed copies of your accounts and/or a reference from your accountant, but this is rare.
What is an SA302 tax calculation?
An SA302 is a summary document of ALL income you’ve reported to HMRC. Once you've submitted your self-assessment tax return, the Revenue issues it to you -- to show how much tax you need to pay.
Lenders use SA302s for self-employed borrowers as they’re the easiest way to verify the declared income on your mortgage application. As yes, the days of ‘self-cert’ mortgages are long gone!
Similarly, if you earn £40,000 a year but only put, say, £15,000 through the books (not something we condone), a lender can only assess your income on the declared £15,000.
What’s the difference between an SA302 tax calculation and a tax year overview?
SA302s have more details and include the full tax calculations for the year. Tax Year Overviews are statements that not only show your tax liability but also any payments you’ve made against that liability.
The tax overview also shows any outstanding tax payments and interest charges incurred on late payments. Essentially, it highlights how well you manage your tax affairs with HMRC. Getting this straight is one of the ways you should financially prepare yourself before applying for a mortgage.
Key documents for sole trader mortgage
Besides your SA302 and tax year overview documents, lenders require the same standard documents as employed applicants. These include:
- proof of ID and address (driving license, passport, utility bills, council tax bill)
- up to three months’ personal and business bank statements
How much can I borrow as a sole trader?
In monetary terms, you will typically be able to borrow 4.5 times your declared taxable earnings. But there are instances when lenders will offer 5 (or even 5.5) times your taxable earnings.
However, other financial commitments in the background could reduce this standard ‘multiple’. Outstanding credit card debt, unsecured loans and car leases will all impact your affordability, adversely!
How much deposit do the self-employed need to find?
Lenders typically ask freelancers and sole traders for a deposit of at least 5% of the property value for your mortgage. However, the greater the deposit you have, the more attractive the interest rate you’ll receive.
Being a sole trader doesn’t mean that you’ll need a higher deposit than someone who is employed. The only time lenders may request a higher deposit is because of other circumstances such as poor credit.
Mortgage interest rates, are they higher for sole traders?
If you go through a reputable broker, you’ll access interest rates on a par with the rates which lenders offer to the full-time employed.
In the past, yes: self-cert rates were higher. But today, if you meet all the criteria, lenders won’t punish you because of the way you work.
How to get a mortgage with a poor credit score and history
If you have bad credit, e.g. late payments, defaults, County Court Judgments (CCJs) or an Individual Voluntary Arrangement (IVA) it is still possible to get a mortgage. Your broker would need to approach a specialist lender, and be aware, interest rates are often much higher than average in these circumstances.
The lender will factor in the age, severity and cause of the credit issue in question, as well as how likely the issue is to reoccur.
Please factor in though -- sometimes a client needs to work on their credit rating before a lender will offer them a mortgage.
Mortgage tips for sole traders looking to apply for a mortgage
Here are some quick tips to help you with your financial preparation before applying for a mortgage as a self-employed.
- Make sure your accounts are authorised by a suitably qualified certified accountant.
- Try and put down a minimum deposit of 10%.
- Check your credit file, rating and history on a regular basis.
- Make sure that you appear on the electoral register at your current address.
- Pay all your bills and credit commitments on time.
- Avoid multiple credit searches, as too many searches can affect your credit score.
Mortgage brokers for sole traders? Speak to Selfemployedmortgages.com
The self-employed mortgage landscape can be complex, and navigating it can feel like a maze.
They specialise in self-employed mortgages and understand lender criteria in great depth. They’ll also ensure your application is structured in the best way to approach the right lenders, based on your unique circumstances.
And although you may be able to secure a mortgage without an adviser, having an experienced, mortgage specialist on hand will ensure you get the best deal that you qualify for. This is especially true if you’ve recently become a freelance sole trader. Putting a roof over your head is one job you don’t have to do on your own! Good luck freelancers.