For many self-entrepreneurs working on their own is surely the best way to generate income. It not only provides the freedom to work as they wish, but also the potential to earn limitlessly. However, when you are ready to get a mortgage, being a self-employed borrower could make this process a little different for you than for borrowers of standard employment roles.
Here’s how you can tweak your chances of getting the best mortgage deal. Your two main concerns might be proving your income and getting a good deal.
Proving your income
The biggest concern lenders have is that they are unable to get a solid view of your income stability.
In comparison to standard employment roles, you are responsible for managing your own taxes, ensuring a steady income and managing your business and personal accounts.
This is where you will use the following documents to show your lender that you can meet their requirements.
SA302 tax calculations and tax year overview – Your SA302 tax calculations form provides evidence of your income through the HMRC. It is the first thing lenders will look at to prove your income. You will also need your tax year overview to verify the information in the SA302 tax calculations form.
You can obtain both documents through HMRC’s online services, where you can download and print up to the last four years of your tax records.
Bank statements – Lenders typically look at your bank statements to find out if you have the necessary income for your deposit and monthly payments.
Your statements should cover up to 2 or more years of transactions. Any copies should be verified by the bank. It is also best to hand in your personal and business statements separately.
Business accounts – Freelancers and sole traders will also need to hand in 2 or more years of accounts verified by a certified accountant. This will be used to understand your average income based on your income patterns.
Increasing your chances of getting a good deal
Lenders will also look at metrics such as your credit score and debt-to-income ratio to evaluate your borrowing risk. Improving these metrics will give you a better chance of getting a good deal.
Credit score – Your credit score is a 3 digit number that determines your reliability in paying your monthly credit payments. This is based on how you’ve managed your payments in the past. Ideally you want your credit score to be higher than 721.
There are a few steps you can take to improve your credit score
- Make payments in full and on time.
- Have a lower credit utilization percentage. You should aim for a credit limit usage of 30% or less.
- Avoid applying for many credit requests for things such as car finances, personal loans and credit cards within a short timeframe
- Keep unused credit accounts open. A long history of credit shows that you have experience.
- Monitor your credit score using one of the 3 major credit bureaus: Equifax, Experian or TransUnion.
Debt to income ratio (DTI) – Your debt-to-income ratio is used by lenders to evaluate your borrowing risk.
This estimates how much of your net income is used for monthly payments.
The lower your DTI, the better you can be trusted to manage your payments by your lender. 46% is the highest DTI to be qualified for a loan.
Focus on reducing your DTI by either decreasing your monthly debt or by increasing your monthly income.
Make a larger deposit – A deposit of 20% or more means that you will not have to pay a big amount in monthly payments. This is beneficial for you to get a lower mortgage rate and to make you less of a risk to the lender.
Use specialist lenders – Specialist lenders are lenders who deal with borrowers, like self-employed borrowers, who don’t categorise into the typical applicant requirements. Using these lenders rather than a usual lender will give you the benefit of getting a mortgage that aligns with your income method.
Use a mortgage broker – Handling a mortgage can be tricky to do alone. Mortgage brokers utilize their expert knowledge to help you work through the multiple requirements of lenders, and get you in touch with the right lenders for you.
Conclusion
Getting a mortgage boils down to how well you can meet the lender’s requirements. If you are self-employed, your aim is to prove that your income is stable enough to last through the duration of your mortgage term. Your best move is to increase your metrics and maintain a healthy financial status as much as possible. You don’t have to do it alone. Get in touch with us for one-on-one guidance.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Approved by the Openwork Partnership on 14.06.2024