How To Get A Self-Employed Mortgage With Bad Credit

Our guide to obtaining an affordable mortgage if you have defaults, CCJs, missed payments or other types of adverse credit

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Graham Cox - Founder & Cemap Mortgage Advisor |
Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

There's no getting away from the fact that obtaining a self-employed mortgage is more difficult if you have bad credit.

Lenders are understandably more cautious and often charge higher interest rates to account for the increased risk. But securing an affordable deal is absolutely possible.

Your chances of success largely depend on the severity of the adverse credit history, and how recently it occurred.

It's also important to get the right advice by speaking to an mortgage adviser experienced in adverse criteria for self-employed applicants, as they can source the most suitable lender and mortgage product for your specific circumstances.

Before then, this guide explains how banks and building societies assess mortgage applications from business owners with bad credit, what the eligibility criteria are, and how to improve your chances of getting approved

Can I get a self-employed mortgage with bad credit?

Yes, absolutely. Though like many things in life, the devil is in the detail.

Both mainstream and specialist lenders consider adverse credit mortgage applications, regardless of whether you're a director of a Ltd company, fixed-term contractor, sole trader or LLP partner.

That said, a low credit score is likely to reduce the pool of available lenders. Cases involving heavier adverse such as ex-bankruptcy, an IVA or multiple CCJs/defaults are usually only considered by niche, more expensive lenders not found on the high street.

What are the eligibility criteria?

The degree of tolerance for impaired credit varies enormously between lenders, but the three most important factors they look at are:

  1. The nature and severity of the credit event(s)
  2. How recently the credit event occurred
  3. The monetary value

Explaining the circumstances around your adverse credit

Banks and building societies search your credit record during the application process for any missed card, utility or mortgage payments, defaults, CCJs, IVAs or bankruptcy records. They'll also ask and/or check if you've ever been repossessed.

It's important to be transparent about your credit history and provide a thorough explanation for any adverse events, as the reason and context behind them can make all the difference.

Some mortgage companies manually underwrite applications and are more flexible in their approach. It's therefore vital to 'tell the story' behind your credit history.

If the bad credit was caused by a simple oversight, a partner's actions or circumstances beyond your control, the lender may look upon your case more favourably.

Get credit file inaccuracies removed

Similarly, banks and building societies will listen if you can prove any missed or late payments on your credit file, are inaccurate. For example, because of a payment dispute or banking hitch.

If the financial institution or Credit Reference Agency (CRA)has agreed an entry is inaccurate, ask them to put it in writing. Or better yet, get it removed before applying.

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What other factors affect mortgage eligibility?

Trading history: You'll almost certainly need a minimum trading history of two years or more.

Income: Earnings can be evidenced through tax calculations, tax year overviews company accounts and bank statements.  Lenders look for a consistent income pattern, ideally with increasing profits.

Some providers allow company directors to use their salary and share of net profit for affordability assessment instead of dividends.

Typically, the three latest business bank statements are checked to ensure current trading is at least in line with the most recent company accounts or tax calculation.

Benefit payments can sometimes be included as income. Child benefit, Disability Living Allowance and Carer's allowance for example.

Expenditure and ongoing financial commitments: Lenders use your recent bank staterments to check current spending is reasonable and there are no signs of financial distress, such as persistent overdraft usage or exceeding its limit.

Financial dependents, such as children or elderly relatives are also factored in.

Any credit card balances, loans, car finance or other debts need to be recorded on the application. These and other ongoing committed expenditures like school fees, child maintenance or spousal support affect the maximum borrowing amount.

Deposit: With adverse credit, a larger deposit of 15-25% is often required. The lower loan-to-value (LTV) mitigates against the increased lending risk. For severe adverse cases such as ex-bankruptcy, you may need a 30-35% deposit.

A bigger deposit can also help secure a more favourable interest rate, though it will depend on how impaired the credit record is.

For example, many banks and building societies won't lend where the borrower has a satisfied CCJ or default registered against them in the last year unless the value is under £250.

Which mortgage lenders accept adverse credit?

Nearly all lenders, including high street banks, accept very mild adverse credit. For example, a couple of late credit card payments made four years ago are unlikely to be an issue if your credit history is otherwise unblemished.

Many also consider mid-level poor credit, such as a single satisfied default or CCJ in the last three years, provided it's at least 12 months old.

In most cases, only specialist mortgage providers consider the most severe forms of adverse credit such as:

  • Ex-bankruptcy or sequestration
  • An Individual Voluntary Arrangement (IVA)
  • A Debt Management Plan (DMP)
  • Missed mortgage payments
  • Property repossession
  • Multiple payment defaults and/or CCJs

Very bad credit massively reduces the number of lenders and products available. Mortgage rates and product fees also tend to be expensive compared to the deals offered by mainstream lenders.

How much can I borrow?

The maximum mortgage loan amount for self-employed borrowers with bad credit depends on several factors, including your credit score, income, expenses, and the lender's criteria.

Typically, the multiplier is 4.5 x single or joint income, minus any deductions.

Assessing mortgage affordability with adverse credit.

Affordability is based on your income after deducting essential expenses and ongoing financial commitments, the interest rate you'll need to pay and the potential impact of interest rate changes.

For a no-obligation estimate of the amount you can borrow based on your particular circumstances, please get started here or call 0117 205 0655.

What can I do to improve my chances?

There are several steps you can take:

Improve your credit score: Make sure your bills are paid on time, clear or reduce any outstanding debts, keep your bank accounts in the black and avoid making multiple credit applications within a short timeframe.

Together, these actions will improve your credit score. You may also want to read our article on five common mistakes to avoid.

Save for a larger deposit: Increasing your deposit can make you a more attractive borrower, as it demonstrates your ability to save and reduces the lender's risk.

If you're struggling to save, gifted deposits from close family members are an option.

Demonstrate financial stability: Lenders prefer to see a consistent income pattern, so level or increased earnings year-on-year will help.

Gather necessary documentation: Gather the required documentation to support your mortgage application in advance. The latest company accounts or tax calculations mustn't be more than 18 months old.

Seek professional advice: Consulting with a mortgage advisor who specializes in mortgages for self-employed borrowers with poor credit can provide valuable insights and guidance tailored to your specific circumstances.

How to get a bad credit mortgage if you're self-employed

Securing a mortgage with bad credit as a self-employed individual may come with higher interest rates or require a larger deposit.

However, by taking proactive steps to improve your creditworthiness and seeking professional advice, you can increase your chances of obtaining an affordable mortgage deal that meets your needs.

To discuss your mortgage options, call SEMH on 0117 205 0655 and chat with an adviser. Alternatively, take our quick and easy mortgage quiz here and schedule a call at a time that suits you.

We'll quickly tell you if your case is proceedable and find you the most suitable mortgage product for your circumstances. We're independent, whole-of-market and true self-employed specialists serving clients across the UK.

Graham Cox - MLIBF CeMAP Mortgage Adviser & Director of Hub FS Ltd

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited.

Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK get great mortgage and protection deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, FT Adviser, and BBC Radio Bristol.