Guidance for freelancers applying for a mortgage

by Josh Biggs in Finance on 2nd September 2022

With freelance work becoming increasingly popular, mortgage lenders are seeing more and more freelance applicants. Although it can appear more difficult for those who are self employed to pass the application process in comparison to those in traditional ‘nine to five’ jobs, it is still achievable; freelancers should not be deterred from applying.

There are a variety of mortgage products available that are built specifically for freelancers, however, it’s important to note that not all lenders will offer these products. Freelance work can fall under a variety of business structures, therefore it can be beneficial to explore self employed mortgage products more generally as many lenders will group all freelancers under the wider ‘self employed’ umbrella.

It’s important to find a suitable lender for the individual situation; just because a lender doesn’t offer a freelance specific mortgage product does not mean that they will not lend to the individual. Many lenders are becoming more aware of freelance business models and the way that freelance workers are paid, resulting in more lenders offering these workers a standard mortgage product, assuming certain criteria are met. 

The importance of collecting supporting evidence

As a freelancer, the mortgage application process can differ from what a ‘traditional’ applicant might encounter. 

Approaching a suitable lender is very important, as not all will work with freelancers. It can be beneficial to explore the option of a specialist, or smaller,  lender that will likely take a more personal approach to the underwriting process. For freelancers whose work does not fit under a traditional business structure, a personal approach from the lender may increase the likelihood of obtaining the loan as the application is reviewed individually, rather than relying on a computer algorithm to make decisions. 

The traditional and most common method of proving both income and job stability is by providing previous payslips. Freelancers might not have a history of payslips to provide to the lender, however, there are other ways of proving employment status.

Instead of payslips, freelancers can provide evidence of contracts and company accounts in order to prove their income and employment status. Self-assessment tax forms, known as SA302s, are also beneficial to show at this stage. It’s also worth keeping any professional online profiles, such as LinkedIn, up to date too, as these can help reassure the lender further.

It is important to note that freelancers are not exempt from the usual checks that lenders will carry out. Prior to the application, freelancers might like to ensure that their credit reports are accurate and up to date, including all addresses and any credit repayments. As with traditional mortgage applications, the presence of a County Court Judgement can drastically reduce the likelihood of a lender accepting the loan.

Finding the ideal lender isn’t an instant gateway to obtaining a mortgage; sourcing an experienced mortgage broker could be beneficial to help guide the borrower through the process. An experienced broker will have likely supported similar applications in the past, meaning they can assist the freelance borrower to achieve the best possible result.

To help the application process run smoothly, we have compiled a list of tips that help cover a wide variety of the elements involved in getting a mortgage as a freelancer:

​​Considerations for all freelancers:

  1. Many people, but especially freelancers, gravitate to their bank to obtain a mortgage in the belief that their bank will understand their finances and will be more likely to lend. This is not necessarily the case, especially for freelancers whose finances may be more complex than an average mortgage applicant’s. Finding a specialist mortgage lender who can understand your business could give a much higher chance of a successful application.
  2. Lenders will understand that different industries make payments in different ways i.e. a videographer may be paid at the end of a project, whereas a marketing consultant may invoice once a month. As long as the freelancer is being paid in what is considered a ‘normal’ way for that industry, and the payment schedule can be evidenced, lenders tend to take a favourable view.
  3. There is generally no minimum age for freelancers to apply for a residential mortgage, whereas buy to let mortgages often have a minimum age of 21, 25, or even 30. If someone has a proven history and deposit, their age should not hold their application back.
  4. Similarly, there is no legal maximum age limit for freelancers to apply for a mortgage, but lenders will set their own criteria.
  5. If freelancing is a side hustle (as opposed to an individual’s main source of income) most lenders’ standard position is to use 50% of their freelancing income in affordability calculations and the individual should be prepared to provide tax returns as evidence that this income is sustainable.

For freelancers running a limited company:

  1. Two years of company accounts are usually required for freelancers running their own business – some lenders may consider less.
  2. Make sure company accounts are filed on time – late filing could ring alarm bells with the lender.
  3. Different lenders will have different affordability criteria and may base their mortgage offer on salary and dividend, net profit or retained profit. It is worth speaking to an accountant to properly understand the relevant figures before applying for a mortgage.
  4. If a freelancer has switched their business model from sole trader to limited company but doesn’t have two years’ worth of accounts, the lender may take a favourable view if the individual is based in a similar industry or sector.
  5. Some lenders will take the average of two years’ accounts, others will base their lending decision on the worst year – whether that be year one or two. Freelancers who have had a particularly poor year (such as due to the impact of the Covid pandemic) but can explain why, could still be considered for a mortgage.
  6. Freelancers who are concerned about having a poor year before applying for a mortgage can ask their accountant for an estimated projections letter to support their case.

For freelancers operating as a sole trader:

  1. Two years of operating as a sole trader is usually the minimum required to apply for a mortgage. Some lenders will prefer more and some will accept less but two years is a good rule of thumb.
  2. Keep all paperwork related to freelance work – from contracts, to bank statements, invoices and remittance notes as a lender may ask to see it.
  3. It can be helpful, but not always essential, to have a separate bank account to keep track of business expenses and income away from personal finances. If not, be ready and able to clearly demonstrate the difference in personal and business funds.
  4. Lenders may use a day rate calculation such as five times the value of daily contracts, multiplied by 46 or 48 weeks (to allow for some downtime/holiday etc). The SA302 form can be used as a way to calculate previous earnings based on submission to HMRC.
  5. If the applicant’s freelance work is in the same sector as their previous employed job, then an application can sometimes be supported by evidence of PAYE income in the form of P60 forms.

For freelancers operating under an umbrella company:

  1. There are mortgage providers like Suffolk Building Society who will lend to freelancers who use an umbrella company but it is usually worth considering engaging the services of a specialist mortgage broker, as the application can be more complex. Much of the guidance above still applies in terms of demonstrating clarity of earnings and stability of contracts.

Categories: Finance