Buying a Home When You're Self-Employed

Buying a home is one of your most significant financial investments. It can become even more challenging when you're self-employed. While it's rewarding to be your boss and be in charge of your finances, many mortgage loans require proof of income to guarantee you'll repay them. 

Traditional lenders may refuse your request because they don't consider self-employment evidence sufficient. However, keep hope; you can still purchase a home. This article will provide tips and advice for buying a house when self-employed.

Gather Your Financial Information

The first step in buying a home when self-employed is to gather all your financial information. Remember that lenders scrutinize your income and financial background to ascertain your ability to repay a mortgage. 

Therefore, you must present financial statements reflecting a steady income source. Some of the documentation you must gather includes tax returns, bank statements, business licenses, and proof of income. Ensure that you have accurate and up-to-date records to make the process smoother.

Consider Low-Documentation Loans

When you're self-employed, you might not have a traditional salary that earns you a steady paycheck, which would make applying for a standard mortgage challenging. Not to worry, low-documentation loans exist; also called "no-docs loans," these loans allow you to apply for a mortgage without submitting any proof of income or minimal documentation. 

Instead, lenders will examine your credit history, property, and bank statements to determine your creditworthiness.

Boost Your Credit Score

Self-employment does not negatively affect your credit scores. However, some lenders may perceive it differently, making improving your credit score increasingly important. 

To do this, get a copy of your credit report and scrutinize it for errors before disputing them. Pay down your credit card debt, avoid opening new credit lines, and pay bills on time to maintain a good credit score.

Get a Bank Statement Mortgage

One solution for self-employed prospective homeowners is to get a bank statement mortgage instead of a traditional one. Instead of relying on W-2 documentation for income evidence, it uses your 12-month or 24-month bank statement to show a steady income and financial stability. 

Companies like NewFi Lending specialize in brokering these kinds of mortgages, so look for some of these alternative lending strategies if you don’t have proper W-2 forms for a normal mortgage.

Work with a Mortgage Broker

Mortgage brokers can connect you with lenders that work best for your self-employment status. Brokers can sort through the lenders and help you find the best interest rate and mortgage program to meet your needs. 

Mortgage brokers can also access special programs, including self-employed mortgages tailored to people like you.

Final Thoughts

Buying a home when self-employed can be challenging, but it's not impossible. Gather your financial information, consider low-documentation loans, boost your credit score, get pre-approved mortgage approval, and work with a mortgage broker. 

Remember, the key to purchasing a home when self-employed is showing a steady income stream and paying capacity.

Can You Get a Mortgage if You are Self Employed?

There are now a larger number of self-employed individuals than ever before – more than 5 million in the UK – and the amount of independent workers could soon over take those employed in the public sector. No matter how successful or financially secure you may be, it can still be very difficult to secure a mortgage if you have your own business.

Although hard to secure, it is not impossible to get a mortgage if you are self-employed. The key is preparing in advance.

Does Business Set-Up Affect Your Application?

Businesses fall into three main structural categories: sole traders, partnerships and limited companies. Which of the three your business falls into can have a big impact on how lenders view the safety of your income.

Sole Traders – When applying for a mortgage as a sole trader, your lender will usually request proof of two years' worth of income. If you complete your own tax self assessment, you may need to provide your total income earned and tax paid via an SA302 form.

Partnerships – Similarly to sole traders, when you own a business with someone else, you will need to prove your portion of taxable income. However, make sure to keep accurate and up-to-date accounts, as you need to be able to show how you split net profits.

Limited Companies – As the director of a limited company, your income probably consists of a basic salary and additional dividend payments. Lenders usually consider both components when assessing a mortgage application, though they may be judged differently based on ownership share.

How Will Your Mortgage be Calculated?

The way a lender calculates rates and amounts varies wildly. While one lender may base your borrowing limit over several years worth of income, another may ask you to include projections of future earnings, but others may calculate using earnings over the last twelve months.

To get the best mortgage, speak to different lenders, shop around and make sure to look into companies such as Saffron Building Society, who offer mortgages catered to the self-employed.

How Can You Maximise Your Chances?

• Make sure you have your SA302 tax form ready as they can take time to arrive in the post
• Increase your deposit to decrease your borrowing amount
• Lenders want to know that you are stable, so aim to increase profits on a yearly basis
• Delay altering the structure of your business as this could hurt your application

When you are self employed you enjoy the benefits of being your own boss. You get to run your own business and determine your own destiny. But when applying for a mortgage you are in the hands of someone else and they are going to decide if you get one or not. As stated before the key is to prepare in advance.