How many years do you have to be self-employed to get a mortgage?

If you’re self-employed and dreaming of owning your own home, you might be wondering how long you need to have been in business before you can secure a mortgage. The good news is that being self-employed doesn’t automatically disqualify you from getting a mortgage. However, lenders typically want to see a stable income history before approving your application.

In this post, we’ll explore the requirements for self-employed individuals seeking mortgages in the UK, including how many years of self-employment you generally need and what other factors lenders consider.

The Standard Requirement: Two Years of Self-Employment

Most UK mortgage lenders prefer to see at least two years of self-employment history before considering your mortgage application. This two-year period allows lenders to assess your income stability and the viability of your business. During this time, you should:

1. Maintain accurate financial records
2. File your tax returns on time
3. Show a consistent or increasing income

The two-year requirement helps lenders feel more confident that your self-employed income is sustainable and that you’ll be able to keep up with your mortgage payments over the long term.

Exceptions to the Two-Year Rule

While two years is the standard, it’s not always a hard and fast rule. Some lenders may consider your application if you have only one year of self-employment history, particularly if:

1. You have a strong track record in your industry
2. You can demonstrate a stable or growing income
3. You have a healthy deposit (typically 15% or more)
4. Your credit score is excellent
5. You have additional assets or savings

In some cases, lenders might even consider applications from those with less than a year of self-employment, but these situations are rare and usually require exceptional circumstances.

Factors Lenders Consider Beyond Years of Self-Employment

While the length of your self-employment is important, it’s not the only factor lenders consider when assessing your mortgage application. Other crucial elements include:

1. Income stability and growth: Lenders want to see that your income is stable or increasing over time.
2. Nature of your business: Some industries are considered more stable than others, which can influence a lender’s decision.
3. Credit score: A strong credit history can work in your favour, especially if you have a shorter self-employment history.
4. Deposit size: A larger deposit can offset some of the risks associated with self-employment in the eyes of lenders.
5. Debt-to-income ratio: Lenders will look at your existing debts and how they compare to your income.
6. Business structure: Whether you’re a sole trader, in a partnership, or operating as a limited company can affect how lenders view your application.
7. Future contracts or work lined up: Evidence of future income can strengthen your application.

Preparing Your Mortgage Application as a Self-Employed Individual

To increase your chances of mortgage approval, consider taking the following steps:

1. Maintain detailed financial records: Keep accurate accounts and ensure your tax returns are up to date.
2. Save for a larger deposit: A bigger deposit can make you more attractive to lenders.
3. Improve your credit score: Pay bills on time and reduce existing debts where possible.
4. Seek professional advice: Consider working with a mortgage broker who specialises in self-employed mortgages.
5. Be prepared to provide additional documentation: This may include business bank statements, tax returns, and profit and loss statements.
6. Consider your timing: If possible, apply when your business is performing well and you have a strong financial track record.

Alternative Options for Recently Self-Employed Individuals

If you haven’t been self-employed long enough to meet standard lender requirements, you might want to explore these alternatives:

1. Joint application: If you have a partner with a stable, employed income, consider a joint mortgage application.
2. Specialist lenders: Some lenders specialise in mortgages for self-employed individuals and may have more flexible criteria.
3. Guarantor mortgages: A family member or close friend with a strong financial position could act as a guarantor on your mortgage.
4. Rent-to-buy schemes: These allow you to rent a property with the option to buy it later, giving you time to build up your self-employment history.
5. Shared ownership schemes: These allow you to buy a portion of a property and rent the rest, potentially making it easier to qualify for a mortgage.

The Importance of Seeking Professional Advice

Given the complexities of securing a mortgage as a self-employed individual, it’s highly recommended to seek professional advice. A qualified mortgage adviser can:

1. Help you understand your options based on your specific circumstances
2. Guide you through the application process
3. Identify lenders who are more likely to approve your application
4. Assist with gathering and presenting the necessary documentation
5. Negotiate on your behalf with potential lenders

Remember, every lender has different criteria, and a mortgage adviser can help you navigate these variations to find the best fit for your situation.

Preparing for the Future: Building a Strong Self-Employed Profile

If you’re not quite ready to apply for a mortgage yet, there are steps you can take to strengthen your position for future applications:

1. Consistently grow your business: Show a pattern of increasing income and stability.
2. Diversify your client base: Relying on multiple clients rather than one or two can demonstrate reduced risk to lenders.
3. Build up your savings: A healthy savings account can provide reassurance to lenders about your financial management skills.
4. Keep detailed records: Maintain organised financial records from the start of your self-employment journey.
5. Plan for tax efficiently: Work with an accountant to ensure you’re managing your taxes effectively without unnecessarily reducing your declared income.
6. Consider your business structure: Discuss with a financial adviser whether your current business structure (sole trader, partnership, or limited company) is the most advantageous for mortgage applications.

Conclusion

While the general rule of thumb is that you need two years of self-employment history to get a mortgage, it’s not an absolute requirement. The length of time you’ve been self-employed is just one factor among many that lenders consider. Your income stability, credit score, deposit size, and overall financial health all play crucial roles in the decision-making process.

If you’re self-employed and looking to secure a mortgage, the key is to present a strong, stable financial profile. This means maintaining accurate records, growing your business consistently, and working on improving your overall financial health. Even if you haven’t been self-employed for two years, there may still be options available to you, especially if you work with a knowledgeable mortgage adviser who understands the nuances of self-employed mortgages.

Remember, every situation is unique, and what works for one self-employed individual may not work for another. By understanding the factors that lenders consider and taking proactive steps to strengthen your application, you can increase your chances of securing a mortgage, regardless of how long you’ve been self-employed.

Ultimately, with careful planning, professional advice, and a clear understanding of the mortgage landscape for self-employed individuals in the UK, homeownership can be within reach. Don’t let the challenges of self-employment deter you from pursuing your dream of owning a home – with the right approach and guidance, you can navigate the mortgage process successfully.

Speak to a an expert mortgage adviser specialising in mortgages for self-employed.