What mortgage lenders seek in self-employed applicants

If you’re self-employed, you’ve learned the hard way that securing a mortgage can be challenging. Perhaps your own bank declined you because your income isn’t “standard.” Or another lender rejected you because they couldn’t see your true mortgage affordability.

Don’t worry. You’re far from alone. These are familiar stories our brokers hear all the time.

The good news is that high street lenders with conventional lending criteria are not your only option. Since 2004, we’ve worked with many lenders to help them develop viable and friendly self-employed mortgage criteria.

Today, we have established strong relationships with over 30 lenders amenable to self-employed applicants. They include specialist underwriting teams at major high street lenders and specialist lenders.

Our network understands that self-employed people work differently. They understand that ‘mortgage affordability’ can be buried under multiple layers.

At Freelancer Financials, we work with these lenders every day. They want to help people with non-standard and complex income structures buy their dream homes. The advantage we can give you is twofold:

• We give you direct access to our network, access you won’t get in-branch or via call centres
• We know how to interpret your income to highlight your maximum affordability to underwriters

Our decades of experience win hands down over you going it alone. We’ve worked on thousands of mortgages where the applicant’s income and/or situation is non-standard. We don’t just tick boxes; we consider the broader view of your earnings.

Here is a simple guide to what specialist underwriting teams/lenders look for, based on how you work.

Sole Traders

As a sole trader, you run your own business as an individual. At the end of the year, your accounts declare your income, profit, and loss to generate your SA302.

Every lender has its own way of deciding what counts towards your mortgage affordability. As a rule of thumb, here are your options:

The Standard Way:

Most high street lenders ask to see 2 or 3 years of trading accounts. They look at your “net profit” (the money left after expenses). They may also consider the trajectory of your business.

On that basis, they’ll assess your affordability using their generic self-employed criteria.

The Specialist Way:

Lenders with specialist self-employed affordability criteria are often happy with just one year’s accounts. If your profit has increased recently, they may look at your most recent year’s figures rather than an average. They’ll also consider time spent within that industry from your PAYE days.

These will help reduce an underwriter’s perception of associated risk. Combined, they could help you borrow more.

For more information, please visit our dedicated mortgage guide for sole traders.

Freelancers

Freelancers might work for several different clients on short-term projects. Assignments could include photography, web content, event management, and many more roles.

Most have fluctuating income, and prepare their accounts in the same way as sole traders. Higher-earning freelancers, working contracts, might opt for a limited company payment structure. The net result from a lender’s perspective is similar.

What Lenders Look For:

Lenders want to see a track record of consistent work. They’ll likely ask for separate business and personal bank statements, too. This trail gives them peace of mind that you’re acting as a business.

They’ll also take your industry into account. It must be viable in today’s socioeconomic market.

The Specialist Difference:

A high street lender might worry about small gaps between projects. It could be that your work is seasonal, or you’ve recently had a life event.

Specialist lenders understand that gaps between assignments happen. In addition, they’ll underwrite your mortgage manually. This allows them to consider your:

• Industry experience
• Ability to find and deliver work
• Potential to earn consistently

Contractors

In the past, when you asked us for a ‘contractor mortgage’, we knew what you wanted. You were a day rate contractor working through a limited company. You typically worked on six-month contracts and had a set day rate.

To work out your mortgage affordability for this scenario, we developed ‘contract-based underwriting’ with many lenders who are amenable and flexible. Job done.

…a contractor by any other name

Today, though, the term ‘contractor’ applies to many more ways of working. CIS, oil & gas, zero-hours, agency work, Locum, umbrella, and more. Many of these we go into more detail about below.

We’ve listed them under different headings because lenders use different criteria for the various types of working. A lender would assess a zero-hours contractor’s affordability much differently than they would a Ltd Co contractor’s.

For this section of the guide, we’re going to stick to the traditional contractor role: limited company, day rate, fixed-term contract, and retained profits.

We address other types of contractors later in this guide. If the way you work isn’t here, our brokers can help you understand what you could borrow for a mortgage. Give them a call. They won’t bite.

Fixed-term, day rate contractors working through a limited company

You work on a fixed-term contract, often charging a daily rate. The term of the contract is usually six months, but can be as little as three or as long as a year.

You keep your salary and dividend drawings low for tax purposes. The bulk of your income you leave in the company as retained profits.

These practices are perfectly acceptable, legal positions for tax-planning purposes. But they’ll only work for you from a mortgage affordability perspective if you use lenders who specialise in contractor mortgages.

The Problem

High street lenders often look at the small salary you pay yourself to be tax-efficient. This makes it look like you earn much less than you actually do. They’ll also flinch at the short-term nature of your contracts.

They can see your day rate. But their affordability calculator will only accept ‘salary’ and “dividend” drawings, leaving your net profits off the table. This ends in either:

• A ridiculously low mortgage offer, or
• Outright rejection, without even trying to understand your payment structure

The Specialist Solution

We use contract-based underwriting. This method means the lender will annualise your gross annual income from your day rate on your contract in their affordability calculation. As well as starting from a higher income point, it bypasses the need to supply accounts.

That means that we can calculate your annual income for affordability purposes like this:

• Daily Rate x 5 (days a week) x 46 or 48 (weeks a year)
• Then, to work out what you might borrow, we use the lender’s income multiplier (anything between 4.5 and 5.5)

This process often allows you to borrow significantly more than referencing your accounts or SA302. Plus, because there’s so little paperwork involved, the mortgages frequently complete more quickly.

For more information, please visit our dedicated mortgage guide for limited company contractors.

Umbrella contractors/employees

Umbrella contractors/employees seemingly can’t win. When they worked through a limited company, advisers told them they needed accounts or payslips. And even though they’ve now got those payslips, lenders still won’t give them a mortgage.

The problem:

Umbrella payslips are not like the traditional PAYE payslips lenders are used to. As well as gross pay, they have all sorts of deductions they’re not used to seeing, potentially including:

• Employer’s NICs
• Agency fees
• Holiday provision
• Assignment Income (Total Rate)
• Employer Costs (Deducted from Income)

An untrained adviser or call centre agent won’t have a clue what to do with most of those. If they offer you anything, it will be a self-employed mortgage based solely on salary. This outcome is often not the best way for an umbrella contractor to get a mortgage.

The specialist lender way:

Most specialist lenders are aware of the recent migration of limited company contractors to umbrella payroll structures. They’re also mindful that contractors no longer feel constrained to working one way or another.

If an inside-IR35 contract comes up, a contractor will use an umbrella company. If it’s outside IR35, they’ll revert to a limited company. They’re also not averse to full-time PAYE roles if the remuneration is worth it.

With our help, a specialist underwriter can get their head around those scenarios in minutes. On that basis, they’ll use an umbrella employee’s gross contract day rate, as they would a limited company contractor. On that basis, umbrella contractors can borrow significantly more than they could by going the traditional application route.

For more information, please visit our dedicated mortgage guide for umbrella employees.

Company Directors (Limited Company)

You run your business through your own limited company. On that basis, your accountant’s advised you to keep your salary and dividend drawings to a minimum for tax purposes.

The problems the director payment structure causes

Lenders usually look only at your Salary + Dividends drawn to assess your mortgage affordability. If you leave money in the company to remain tax-efficient, traditional lenders can’t count it in their calculations.

They will, in effect, treat retained profit as they would employee bonuses. More often than not, that means leaving it out of their affordability calculation altogether.

The Specialist Way

Our specialist lenders underwrite company directors’ mortgage applications manually. That means they can incorporate any retained profits.

To work out your affordability, they include your salary plus the net profit your company made. Combined, these give a much more accurate picture of what you can afford.

For more information, please visit our dedicated mortgage guide for company directors.

Locums / NHS Staff

You work medical shifts, perhaps as a “bank nurse”. Or you’re a locum doctor, whose work pattern, thus income, is irregular. This irregularity falls outside the range that traditional affordability calculations were designed to accommodate.

What Lenders Look For

Stability is key in many lenders’ criteria. The way you work throws their expectations and attitude to risk. They often get confused by irregular shift patterns or income that varies from month to month.

The Specialist Way

Specialist lenders understand how the NHS and private medical work operate. They’re used to seeing variations in pay slips, so won’t try to fit your income into an inflexible algorithm.

Instead, they’ll underwrite each application manually, based on its merits. That may mean averaging your income over a set period, which then accounts for its peaks and troughs. On that basis, they’ll calculate your borrowing power fairly and accurately.

For more information, please visit our dedicated mortgage guide for locums.

CIS Contractors

If you work in construction and have tax deducted (usually 20%) before you get paid, the chances are you’re in the CIS. This combination really confuses traditional lenders. You’re self-employed, but have tax deducted by your hirer. How does that work?

The Problem:

Most lenders will treat you as a standard sole trader. So, to work out your mortgage affordability, they’ll look at your profit after expenses and tax. That’s no reflection of what you can really afford.

The Specialist Solution:

Specialist lenders who underwrite manually can treat you similarly to an employee. They look at your gross income (the amount before tax deductions), your CIS slips and your bank account. Using your top-line day/hourly rate often allows you to borrow much more than using your tax returns.

For more information, please visit our dedicated mortgage guide for CIS contractors.

Zero-Hours Contractors

You have a contract, but your hours are not guaranteed. This means your income can vary week-to-week, let alone every month. This uncertainty sets off all sorts of alarms when they try to process your application in their rigid systems.

What Lenders Look For:

Underwriters at specialist lenders will manually underwrite your application. That means they’ll base their decision on merit using their inherent common sense.

They’ll want to see evidence that your work is regular, even if your contract says “zero hours.” They’ll also need to see your bank account to ensure that you’re working the hours your contract stipulates.

They may also take into account the industry you’re in. If it’s seasonal, they’ll look at your average income over a defined period.

The Specialist Way:

Lenders usually require 12 months of employment history with the same employer. In some instances, those twelve months might include time spent there as an employee. If so, they’ll need assurance that your role is viable.

They will take an average of your earnings over that year to work out what you can borrow.

For more information, please visit our dedicated mortgage guide for zero-hours contractors.

We’re Here To Help

Navigating these rules can be confusing, especially if English is not your first language. That is why we’re here: to do the heavy lifting for you.

We know exactly which lenders accept which types of income and how they’ll calculate affordability. Even after a first conversation with us, our broker will apply their experience to your situation. They can then narrow down your application to only the most appropriate lenders.

We present your application to the underwriting teams at specialist lenders (and, if their criteria are flexible enough, traditional lenders). Packaging your application in the right way is absolutely key. It gives you the best chance of the lender saying “Yes”, keeping your mortgage aspirations on track.

If we haven’t given a brief overview of how you work above, check out our People We Help page.

Or, if your situation is more complex, talk to us. Many of the specialist lenders we deal with have robust lending criteria in place. They excel in helping people with non-standard income or circumstances.

Ready to find out how much you can borrow? Start your conversation with us today for a friendly, no-obligation chat.