5 Mistakes You Must Avoid To Get A Self-Employed Mortgage

Read our simple guide to boost your chances of mortgage success.

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

Often the biggest obstacle to getting a self-employed mortgage is understanding how lenders will assess your application.

Without this knowledge, It's very easy to make an innocent mistake that will scupper your chances of success.

Well, as the saying goes, forewarned is forearmed. That's why we've put together this list of the 5 most common mistakes to avoid before applying for a self-employed mortgage.

Eliminating these will drastically improve your chances of getting a mortgage application approved.

Read on to discover how to tilt the odds in your favour.

1: Minimising company profits and dividends

We often get approached by clients who've just found a property they want to purchase, but whose income won't quite stretch far enough to buy it.

Often the shortfall is due to intentionally minimised profits. It's understandable, because your accountant will try to use every available allowance and expense to reduce corporation tax and/or your self-assessment tax bill.

This, of course, affects mortgage affordability, because your salary and dividends or net profit will largely determine how much you can borrow.

Talk to your accountant early

That's why we always recommend speaking to your accountant as early as possible. If you think you'll be looking to buy in a year or 18 months time, let them know straight away.

If you can, provide them with an idea of your likely purchase price and approximate borrowing amount.

That way, they can prepare your business accounts and tax returns to show sufficient income to get the mortgage you want.

It will mean more tax to pay for that particular year. But if it allows you to buy your dream home, it's worth every penny.

Nearly all lenders cap the maximum borrowing amount to
4.5 times income for self-employed applications, although higher multiples are available for higher earners and self-employed professionals in certain occupations.

How lenders calculate self-employed income varies according to your business structure. For example:

  • Sole traders: Net profit before tax
  • Company directors: salary and dividends or salary and net profit (usually post corporation tax)

2: Credit score issues

Your credit rating and history has a huge bearing on:

  • whether you can get a mortgage loan
  • the interest rate and product fee you'll pay
  • the choice of lenders available to you
  • when to apply for a mortgage

That's why it's well worth checking your credit report long before you want to apply for a mortgage.  With advance warning, it may be possible to resolve any issues and improve your score before you apply.

Here's the key things to check on your report:

Check you appear on the electoral roll

Not appearing on the electoral roll at your current residential address, can have a detrimental affect on your credit score.

If you think you've registered on the electoral roll but it's not showing up on the credit report, speak to your local authority to help resolve the problem.  Otherwise you can register here.

It's also important to ensure your residential address is written consistently across bank accounts, council tax, utilities and so on.

Are there missed payments you weren't expecting?

Next, check your credit report for any missed any payments in the past two to three years against:

  • credit or store card bills
  • utility bills
  • secured loans
  • personal or unsecured loans
  • any existing mortgages (excluding agreed mortgage holidays due to Covid)

Unless it's a missed mortgage payment, an occasional, one-off missed payment is not usually not a huge problem.

But missing two or more consecutive payments can have a negative impact on your credit score and reduce your chances of getting the mortgage you need.

Resolve credit report errors

If the cause of the late or missed payment is a mix up with your utility bill or credit card provider, contact them to see if it can be removed. If it's their fault, and they drag their feet, escalate it to a formal complaint.

At the very least, ask the creditor to confirm their error in writing whilst they get the missed payments removed from your credit record.

The letter can then be presented to lenders in mitigation.

Payday loans - the death knell for mortgage applications

Avoid payday loans. They're a red flag for lenders, because taking one out is an indicator of financial distress and struggling to make ends meet.

If you've had one in the last year or two, most banks and building societies won't lend to you.

Settle CCJs within one month

If you've just had a County Court Judgement (CCJ) issued against you, pay it within 1 month to have the judgement cancelled or 'set aside'. That way, the CCJ won't appear on your credit file at all. Otherwise, it will show up for 6 years

You'll need to provide the court proof of payment from the person or business you've paid.

You can also ask the court to set aside the judgement if you don't believe you owe the money, or were never notified of the original claim.

Book a call back and save your most valuable business asset...time.

"Brilliant from start to finish. Graham managed to find a main high street lender who offered a brilliant rate. Would highly recommend."

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3: Applying without a strong company balance sheet

As a company director, one of the first financial documents lenders check is your limited company's balance sheet.

They'll want to see your business has:

  • sufficient liquidity: the ability to pay short term debts
  • adequate solvency: to meet long-term financial obligations.

Liquidity is measured by the net current assets/liability line on the balance sheet. Whilst the shareholders equity line (a.k.a Total equity) shows the level of solvency.

Without adequate liquidity and solvency in the business, your mortgage application is likely to be declined.  Even if your business is generating sufficient profits for the size of loan you're seeking.

4: Over-reliance on one client for business revenue

If your business is solely or overly dependent on just one client for it's income, getting a mortgage can be tricky.

Some mortgage companies may be wary of providing a loan, even if you've retained the client for several years.

With just one client providing the lion's share of revenue, losing that client could put your own business, and your property, at risk.

Diversifying your client base makes it far more likely banks and building societies will lend to you.

5: Excessive personal expenditure and credit commitments

This is a biggie.  

For obvious reasons, all mortgage providers require evidence you can live within your means and afford the mortgage payments.

Whilst lenders typically use average expenditure figures as supplied by the government's Office for National Statistics (ONS), they will also check each applicant's actual expenditure, usually from your last 3 months current account bank statements.

Ensure income exceeds outgoings each month

You don't have to live like a monk. Regular, normal expenditure is fine. But it's important outgoings are consistently less than income in any given month.

Expensive one-off items like holidays are not usually a problem as long as the cost is proportionate to your income.

Avoid going into your overdraft

If at all possible, avoid using your personal bank overdraft facility. A bank or building society could decline an application if your current account is regularly overdrawn.

Regular gambling

If you like a punt, consider giving it a miss for a few months before applying for a mortgage.

The occasional small wager won't raise any alarm bells, but several decent size bets or online gambling deposits a month definitely will.  In fact, a lot of mortgage providers won't consider applications from anyone with a regular gambling habit.

Clear or reduce existing credit commitments

Nowadays, lenders need to factor in an applicant's expenditure as well as income when assessing the affordability of the mortgage.

So having large ongoing credit commitments could prevent you borrowing the amount you need for your property purchase.

Large credit card balances, personal loans and car finance agreements (personal, not business) are all taken into consideration.

If you pay off your credit card balance every month, that's absolutely fine. But large outstanding balances will count against you. Especially if you're only paying the minimum 3% or 5% of the balance each month.

Other committed expenditure

Aside from credit commitments, child maintenance, spousal support payments, education and tuition fees are all considered by the bank or building society as part of the overall affordability assessment.

If you can, clear as much personal debt and reduce committed expenditure as possible before applying for a mortgage.

Book a call back and save your most valuable business asset...time.

"Brilliant from start to finish. Graham managed to find a main high street lender who offered a brilliant rate. Would highly recommend."

Tracy Boyle - Google Business Review
Talk to an adviser
Book a call back at time to suit you.
Schedule a call in 90 seconds.

Ready to get a self-employed mortgage?

We hope you've found the above tips useful. They're based on our extensive experience of dealing with self-employed mortgage applications and talking to lenders across the market.

If you're ready to proceed, the next step is to speak to an advisor at SEMH. During the 10 minute call, we'll answer your questions, indicate how much you can borrow, and advise you on the next steps to securing a great mortgage deal.

To get started, you can call 0117 205 0655 or make an enquiry online. Our office hours are 9am - 5pm Monday to Friday.

We look forward to talking with you soon!

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.