Self-employed people have traditionally struggled when it comes to convincing lenders to grant them mortgage loans. It’s often part-and-parcel of the nature of self-employment that remuneration can be sporadic and unpredictable, causing lenders to be concerned about whether future repayments on a loan will be correctly made.
Additionally lenders require detailed income checks and examine historical declared earnings for a self-employed applicant and this can add weeks to the mortgage application process. Regarding eventual buying success, this extra delay has often caused potential sellers to pull out.
So how can you as a self-employed mortgage applicant give yourself the best chance of finding a mortgage lender and mortgage suited to your needs so you can get your conveyancing for your new home under way? Here’s 5 basic steps which should help this aim.
1 Get a year under your belt
It’s fairly certain that no lender is likely to consider granting you a mortgage if you’ve been trading for less than a year.
Once a year has elapsed, you might find some lenders willing to refer your application to their underwriters for risk assessment. Once you’ve stayed afloat for 3 years, all other things being equal, lenders will generally view your income as stable. You should also consider taking a look at the different options available to you. For example, if you are a veteran, you may be eligible for a loan with better rates.
2 Check your credit score
Once you’ve bought a home and have a record as a mortgagor, assuming you’ve successfully made your monthly repayments without defaulting, you can reasonably assume you’ll have a good credit score and have more chance of getting a mortgage again.
On the other hand, if you’re a first time buyer with a relatively small deposit, it may be that your credit score is too low to satisfy a lender.
Either way, it’s worth checking your credit score and report with the 3 main credit reference agencies, given that this is always of huge importance to prospective lenders.
3 Consider an offset mortgage
If you’re successful in getting a mortgage while self-employed, having a bank account with your mortgage lender is a way you can potentially reduce your monthly interest repayments.
Frequently, self-employed workers put cash aside every month towards paying off their yearly tax demand – this practice works very well if you have an offset mortgage and additionally is a hedge against an unpredictable income stream.
On the flip side, these kind of mortgages often carry a higher interest rate than many other products – you need to compare rates and consequent repayment amounts carefully.
4 Instruct a mortgage broker
Independent mortgage brokers (i.e. those who are not tied to a particular lender) have access to the whole of the market of mortgage products, of which there are more than 3,000.
They are much more likely to be able to find you a self-employed mortgage product which suits your own particular needs and additionally will have an informed opinion on whether you will be successful in your mortgage application.
5 Gather together your previous years’ accounts
You can expect it to be harder work getting a mortgage if you are self-employed compared to if you are employed. You can best help yourself at the start by getting your previous 3 years of financial accounts (if you’re a company) or tax returns together. These records are always key information for your lender to scrutinise.
With increasing numbers of people in the UK now classed as self-employed, it follows that mortgage lenders are getting more used to applications from this sector. And even if more work is involved for these applicants, persistence and an organised approach can help them win the day.