Can you still get a mortgage if you're self-employed?

Amid reports of first-time buyers being denied mortgages, what are the options for those who are self-employed?

Mortgage application: how much can I borrow?
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With reports of first-time buyer mortgages being harder and harder to get as the impact of Covid-19 kicks in, what are the options for self-employed people who want to own a home? 

Confusion has always surrounded self-employed mortgages, with many people simply assuming that being self-employed in itself will get their application turned down. Has Covid-19 restricted access to mortgages for the self-employed even further? And what should you do to maximise your chances of getting approved?

Will I be denied a mortgage if I'm self-employed?

No – this is a persistent myth that shouldn't stand in your way if you want to own your own home. Getting a mortgage is currently harder for everyone because of post-Covid nervousness among lenders – but your application won't be automatically turned down, provided you have the correct paperwork (more on that below) and your income hasn't dropped below what's required to qualify for a mortgage (lenders will only lend up to four and a half times your income).

Do I need a larger deposit if I'm self-employed?

No – again, this isn't true. What is true is that under current circumstances, everyone, regardless of their employment particulars, needs a 15 per cent minimum deposit to successfully apply for a mortgage. There is a very limited number of 90 per cent mortgages still available, but if you are self-employed, you may find yourself  at an extra disadvantage if you try applying for one. 

The reason is not quite what you might think: partly, lenders are restricting the numbers of applications for high LTV mortgages because of staff shortages. With fewer resources to consider applications, a self-employed application is more likely to get rejected simply because it takes more time and effort to process. For that reason, we'd advise against going for 90 per cent mortgages if you're self-employed right now, at least until lenders are back to full capacity.

Will I be turned down if I've taken a government grant due to Covid-19?

No – a government grant for the self-employed will not count against you; what will count against you is the reduced amount of money coming in each month, since the grants only cover 80 per cent of earnings up to £2,500 a month, which mirrors the situation with furloughed employees. 

Remember: lenders can't lend on hypothetical earnings, only on what they see in front them when you apply. So, if your earnings have dipped because of coronavirus and you've requested a grant, wait for your income to stabilise before applying.

Mortgages for the self-employed: common reasons for being declined

This is not to say that self-employed applications don't get rejected – they often do, and it's important to understand why this happens before you apply. Remember that a failed mortgage application leaves a negative mark on your credit history, so it's best to make sure your application is spick and span before you take the plunge.

One of the most common reasons why self-employed applications are rejected is the lack of correct accounting going back three years. This doesn't mean that if you only have one of two years' accounts, you'll be rejected by every lender (some will accept just one year), but you will need a very good explanation for why the paperwork isn't there.

The other common reason for rejection is inconsistent income. Lenders don't like seeing huge increases or dips in income, preferring steady figures. If you are in a line of business where profits fluctuate, you should speak to your accountant about setting up a regular salary for yourself, while keeping extra profits in a company account. 

It's important to note that if your salary is set too low, that is again a ground for rejection. Some lenders will accept company dividends as income, but not all do: most prefer judging your application on the money that regularly comes into your account. 

Finally, if you are self-employed, you need a pristine credit history to be successful in your mortgage application. That means no maxed-out credit cards, no payday loans, and no payment holidays on any of your loans. 

Do I need a mortgage broker if I'm self-employed?

Absolutely – even more so than an employee applicant. A whole-of-market broker will be able to put you in touch with specialist lenders who have seen many applications like yours and are better set up to consider self-employed applicants. A broker can also give you honest advice if they think you're not quite in the right shape for a mortgage application just yet. One thing we would say is: avoid just going to your bank and hoping for the best; bigger lenders are always the most risk-averse ones, so you're more likely to be rejected. 

We've teamed up with online mortgage specialist Habito: use their free comparison tool below to get an idea of how much you could borrow, and chat to an expert advisor for free, unbiased advice.