5 things to consider if you’re self-employed and buying a home

woman at desk

No matter who you are, buying a home in 2022 may come with some challenges.

For example, according to government data, Scottish house prices rose by 10.8% in the year to January 2022. So, it could be that your dream home may cost more than you had originally thought.

Plus, in response to inflation reaching a 40-year high, the Bank of England (BoE) raised the base rate to 1% in May 2022. This means that borrowing could be more expensive than it was 12 months prior when the base rate stood at just 0.1%.

If you are self-employed, there may be additional considerations to make when buying a home, compared to your employed peers. On top of the factors all homebuyers should consider this year, self-employed individuals may be required to take even further steps to secure their dream home.

Read on to find out five essential things to consider if you’re buying a home as a self-employed person.

1. You are usually considered “self-employed” if you own more than 20% of your business

You don’t have to be a sole trader or an equal-split owner of your business to be considered self-employed in the eyes of a mortgage lender.

Indeed, most lenders will consider a person self-employed if they own more than 20% of the business from which they receive their main income.

So, even if you have been employed most of your life, and have recently become a partner or company director, for example, you may still be considered self-employed by a lender.

If you are unsure how lenders will view you, it may be constructive to consult a mortgage expert for guidance.

2. You will need to prove your financial viability to a mortgage lender

As an employed person, it’s easy to confirm how much money you earn and how much tax you pay – your PAYE records will speak for themselves.

However, when you’re self-employed, you will be required to provide proof of income to a mortgage lender as part of your application.

Indeed, proving affordability without the support of an employer can be a complex process. FTAdviser reports that one-third of people were rejected for a mortgage in the five years to 2021, and of those rejected, 44% stated that “irregular income” was the main reason.

What’s more, the same study revealed that 10% of those rejected were self-employed.

Typically, lenders may ask for two or three years of financial records, including your earned income and tax payments. So, it is crucial to remain vigilant when it comes to organising your financial affairs as the years go by.

It is important to keep well-organised records of your financial circumstances, including:

  • Invoices
  • Contracts signed by both you and your clients
  • Self-assessment tax forms, preferably overseen by a professional accountant
  • SA302 forms if appropriate
  • At least two years’ accounts if you have them
  • 3 to 6 months’ worth of personal and business bank statements
  • Proof of debt repayments, such as credit card statements
  • Household expenditure, including previous mortgage payments, Council Tax bills, and energy outgoings.

Maintaining impeccable financial records over the years could make the mortgage application process smoother. If you need guidance on providing your financial records to a lender, get in touch with us.

3. You could benefit from taking additional steps to support your mortgage application, such as securing an Agreement in Principle

As a self-employed person, it can be helpful to acquire supporting documents that further prove you can afford the mortgage you want.

In addition to providing well-organised financial records, some additional steps you could take are:

  • Acquire an Agreement in Principle (AIP), which shows you how much you might be able to borrow from a particular bank or building society
  • Make sure you are on the electoral register
  • Save the biggest deposit you can
  • Check your credit report, and change any incorrect information within it.

By doing this, you create a stronger financial portfolio that might encourage lenders to offer you a mortgage deal.

4. Once you have secured your dream home, it could be wise to protect your income against unexpected events

Many people become caught up in the mortgage application process, without taking the time to consider the long-term financial challenges of owning a home.

Indeed, as a self-employed person, you may not benefit from the package of financial protection that your employed peers might enjoy. This could include full sick pay for as long as you are ill; death in service; and critical illness cover.

Once you have secured your dream home and begin repaying your mortgage, it is essential to consider what might happen if you become unable to work for a time.

Providing yourself with a safety net, such as income protection, could give you the financial security and peace of mind you need as a self-employed homeowner.

5. Working with a professional could help you buy your dream home if you’re self-employed

If you feel overwhelmed by the idea of buying a home this year, you can read last month’s insights on how to reduce the stress of buying a home.

In addition to reading our blogs, working with us could make all the difference. With the right support, you could have access to just as many appealing mortgage deals as an employed person, and be able to buy the home you’ve always dreamed of.

We can help connect you with lenders who frequently work with self-employed homebuyers, as well as provide bespoke insights into how to maximise your chances of getting the mortgage you want.

Get in touch

For specialist guidance on buying a home when you’re self-employed, email [email protected] or call 0131 339 2281 to speak to us.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.

This entry was posted in Edinburgh Mortgage Advice, Self-employed. Bookmark the permalink.