Going through the process of securing a mortgage and buying a home is hard enough when you have a regular salary from permanent employment. For freelancers it can be even trickier thanks to fluctuating income and having to provide evidence of your earnings.
We look at what it means to buy a house when you’re a freelancer, what to expect from income assessment, and share some tips to help steer you in the right direction.
Can a freelancer get a mortgage?
The simple answer is yes, it is entirely possible to get a mortgage as a freelancer. This means you can pursue your freelance business and still be on track to buy your own home.
Unfortunately, it can often be significantly more difficult for you than your salaried counterparts. For freelancers, the eligibility goalposts are shifted and demonstrating proof of affordability to mortgage lenders is a far more rigorous process.
Lenders and freelancers
Mortgage lenders assess applications against things like employment stability, income consistency and credit history – anything that indicates a person’s ability to repay what they borrow. For freelancers with fluctuating income, convincing lenders you can make mortgage repayments, along with interest, can be a bit of a battle.
Not all lenders will be open to the idea of letting freelancers borrow due to the more complex way self-employment income is generated. That said, there are lenders out there who are more flexible than others.
Another positive is that because an increasing number of people are choosing self-employment – there are now more than 2 million freelancers the UK alone – more and more mortgage lenders are reconsidering who they’re willing to take applications from.
Deposits for freelancers
You might be wondering if freelancers need to pay bigger deposits than salaried buyers when purchasing property – the answer isn’t a simple yes or no.
As a freelancer, you don’t need to pay a bigger deposit by default. However, it could certainly strengthen your mortgage application process if you can afford to put a larger lump sum down.
Offering a deposit of 20%, 30%, or even more, could significantly boost your chances of approval.
This isn’t a hard-and-fast rule, however. If your income is solid and your affordability profile looks good to a lender, you may very well be accepted with a 5% deposit. It’s all about doing the right research and reaching out to the right lenders. You might find a mortgage broker helpful.
How freelance income is assessed
If you’re registered as a sole trader, lenders will typically establish your affordability through your net income – what’s left once you pay your tax bill and other expenses. If you’re the director of a limited company, lenders can take salary and dividends into account too.
If you work from contract to contract, mortgage lenders will want to understand the value of these contracts to ascertain your affordability status. In some instances, lenders may base this on your daily rate instead.
So, how your freelance income is assessed really depends on what type of structure you operate your business as.
You’ll find that most mainstream lenders will ask to see three years’ worth of accounts, but there will be others who are willing to assess your application based on two or even just one year’s worth of accounts and earnings. You’ll normally also need to submit a SA302 tax calculation form to show evidence of your earnings.
Remember, the mortgage application process can vary massively from one lender to another, and eligibility criteria can be even more nuanced. Shop around and compare your options to find the one that suits you.
Mortgage tips for freelancers
Securing a mortgage as a freelancer is more of an uphill battle than it is for those with a regular employment salary. Here are some tips to help.
Use a self-employed mortgage calculator
There are a whole host of mortgage calculators available online to help you work out what you can afford to borrow according to your income and desired deposit. There are even several mortgage calculators designed specifically for self-employed people such as freelancers.
Using a mortgage calculator will give you an idea of your current situation and where you stand financially before you even start house hunting. You can use this to help you work out a savings goal or timeline, and to establish what kind of property or location you can afford.
It is important to note, though, that while tools like these are useful, they should only ever be used as a rough guideline. Criteria can vary so much between lenders and individual situations.
Set up a meeting with a reputable mortgage advisor
Look for a mortgage advisor who has worked with freelancers or other self-employed people in the past. They’ll understand the particular hurdles you’re facing and will be able to give an informed opinion about how low, mid or high-risk your application may be.
They’ll also be best placed to offer expert advice on how to improve your chances of securing a mortgage as a freelance earner.
Seek advice from your accountant before applying for a mortgage
When it comes to any matters related to money, especially big decisions like buying a house, it’s always a good idea to schedule some time with your accountant and examine your finances first.
They’ll be able to help you make accurate forecasts based on your situation, which will allow you to gain a better understanding of your affordability.
Plus, they’ll also help you ensure you’re up to date with all your taxes and any other payments. This is crucial as your affordability can only be based on the income you declare and record!
Find even more advice and guidance for freelancers in our info hub!