Dispelling Myths for Self Employed Mortgages

Before the credit crunch, self-employed people had no trouble securing a mortgage. The process was very simple and all they had to do was state their earnings as part of the application process. As a result, a lot of people were dishonest in order to be able to borrow more.

When the financial crash hit, house prices dropped, and many people were left up owing more than their property was worth. The mortgage industry was forced to reform and put better checks in place for all borrowers, but these checks seem to have hit the self-employed the hardest.

Nowadays, while it might be more difficult to secure a mortgage as a freelancer, it isn’t impossible as many people would have you believe. There are so many myths circulating, and we’re going to dispell all of them today. Starting with…

You can’t get a self-employed mortgage from a high street lender

This myth is common because self-employed people often give up looking for a mortgage if they have been rejected by one lender. All lenders approach mortgages in a different way, so you might not be eligible with one lender, but others might be more than willing to work with you rather than against you. And this includes high street lenders. If you are able to show year-on-year growth of net profit, then Santander and Coventry Building Society are both great options. Those running limited companies can also consider HSBC and Virgin Money.

You can’t get a self-employed mortgage with less than two year’s of accounts

All lenders will look at freelancer and self-employed accounts in a different way. While some will want to see two year’s worth of accounts, others will ask to see the last 12 months of earnings. Some will take the average of your past few years of earnings while others will look at the most recent year as an indicator of future earnings. In some cases, you can show future contracts as proof of earning potential. It all varies depending on the lender, which is why it is beneficial to work with a specialist mortgage advisor who can point you in the right direction.

You have to find a specialist “self-employed mortgage”

There is no such thing as a self-employed mortgage. Once you have passed a lender’s initial checks, you will be treated like any other lender and have access to the same products and services. While some lenders might specialise in working with the self-employed and business owners, the actual mortgage product is the same as other mortgages. This is another reason that self-employed people wrongly assume that they will not be able to get a mortgage. There is a false assumption that self-employed people can only work with lenders that expressly work with the self-employed.

You have to have a huge deposit for a self-employed mortgage

While this is true in some ways, a big deposit can help you to be seen as a better borrower. But this is the case for anyone seeking a mortgage. If you can offer a bigger deposit, you will be a lower risk borrower and the lender is more likely to offer you a preferential rate. This is because a large deposit offers greater protection in the event the value of the house falls. While there are mortgages available for those who can only afford a 5% deposit, these mortgages will be more expensive. If you can secure a deposit of around 20-30% you will find that the interest rate on offer will be much lower.

If you are self-employed and looking for a mortgage, shop around for the best deal and never assume that a rejection from one lender will mean all lenders will reject you.

Can you get a mortgage after the IVA?

An IVA, otherwise known as an Individual Voluntary Agreement is a legally binding agreement between you and your debtors. IVAs are often drawn up to help people pay off their debts and wipe the slate clean. An IVA will last for six years and will appear on your credit report. As a result, you won’t be able to take on any further debt for the duration of the IVA.

IVAs differ from CCJs are they are voluntary. A CCJ is the result of your debtors taking you to court. People choose to enter into IVAs for a number of reasons, but taking control of their debt is the top reason. If your debts become unaffordable, an IVA can help you to take back control of your life and learn to live within a strict budget.

Even if you pay off the IVA early, it will still remain on your credit report for the same amount of time. Most IVAs last for five years and the IVA will remain on your credit report for 12 months after you have received your IVA Completion Certificate.

For those keen to get on the property ladder, an IVA might make things more difficult, but it is not impossible. There are steps you can take to secure a mortgage with an IVA on your file. Alternatively, you can simply wait until the IVA has dropped from your credit report and begin building your credit up.

Can I get a mortgage with an IVA?

Lenders will look at your credit report as part of the mortgage application. An IVA, CCJ or default on your file can make you less attractive to a mortgage provider. This is because they are looking at the risk associated with lending to you. People with adverse credit history are considered high risk. Even if you have taken control of your spending and changed your ways, an IVA can still impact a lending decision.

While one bank might turn you down for a mortgage after an IVA, another bank might accept your application. There are specialist lenders that work with people with poor credit. They might ask for a larger deposit or offer a higher rate of interest, but if getting on the property ladder is important to you, this might be worth it.

How long should I wait before applying?

An IVA will stay on your credit report for six years. After it has dropped from your report, you might notice that your credit score is still low. This is because you will have a six-year period where you have not shown any evidence of being able to pay back debts. It’s very difficult to secure credit with an IVA, so you will essentially be starting from scratch when the IVA is complete.

The best option for those with an IVA wanting to secure a mortgage is to wait until the IVA has been removed from their credit report and then taking steps to improve your credit score. This will make it easier to secure a better rate on your mortgage. Once the IVA is gone from your report, you will be treated like any other lender.

How do I improve my credit after an IVA?

Once the IVA is gone, you can focus on rebuilding your credit. To start with, you should sign up for the three credit reference agencies Equifax, Experian and Callcredit. This will allow you to see what lenders see and fix any issues with your report.

After this, you should look at responsible and affordable lending to start building a track record of making payments on time. Beware of irresponsible lenders that will focus on people with adverse credit history. They might offer large lines of credit at a high rate of interest which can be problematic if payments are missed. Instead, look for specialist credit cards with low limits to help you build your credit.

Securing a mortgage in principle

You can start the mortgage process off by securing a mortgage in principle. This is a kind of pre-qualified application that will give you an indication of how much you can expect to borrow. If you have recently completed an IVA and are building your credit score, you can start the house hunt with just a mortgage in principle. Once you have chosen a property, you can put in an offer and then the bank will process your full application. This can buy you an extra couple of months to build your credit score.

Always shop around

Rejection by one lender does not mean that all lenders will reject you. Shop around and speak to specialist mortgage brokers who will be able to advise you on the best course of action. Time heals most issues with your credit report, so if you can wait it out, you can be confident you will be treated like any other borrower and won’t need to worry about your adverse credit history anymore.

Can I Get a Mortgage with Defaults & CCJs?

If you have defaults or CCJs on your credit report, you might be wondering if you are able to get a mortgage. While some people might struggle to reconcile poor credit history with mortgage lending, it is possible to do. You might need to find a bigger deposit or put up with higher interest rates, but it is possible to get a mortgage following a CCJ or default. Read on to find out how to secure a mortgage with defaults and CCJs.

Get an accurate picture

The first step to securing a mortgage is to understand what you are working with. Sign up to all major credit reference agencies so that you can see how mortgage providers see you. You should create an account with Experian, Equifax and Statutory Credit Report. You will have a different credit score with each provider, but this can help you to understand your position.

Start by checking that everything is accurate. If you paid off the CCJ within the required timeframe, it should not be applied to your credit report, so you can request to have this removed. Some people wrongly assume they have a CCJ when their debt has been fully repaid.

Once you know what mortgage providers will see when they look at your credit report, you can begin to fix key issues.

Shop around for a provider

Some mortgage providers will reject individuals with CCJs immediately. Others will look at other factors and take a more considered approach. Each lender is different and you can’t assume that being rejected by one lender means that all lenders will reject you. Take the time to find a specialist lender that will work with you rather than against you.

Give it time

A CCJ or default can only stay on your credit report for six years. After this time, they will be removed and no trace will remain. If they aren’t removed in time, get in touch with your creditor to confirm your debts have been paid and you have completed any County Court Judgements.

If you can wait it out, then it will be much easier to get a mortgage with the CCJ or default removed from your file. This will give you access to a wider range of lenders and preferential interest rates. If you cannot wait, you might need to be more flexible with your choices.

Getting a mortgage with a CCJ or default

In many cases, getting a mortgage with a CCJ or default is difficult but not impossible (see here). You may be required to secure a larger deposit, which can seem impossible if you don’t have access to the funds. One way to increase your deposit amount without increasing your costs is to look for a cheaper property. You might have to compromise on some of the features you would prefer, or look for a property that needs a bit of DIY work, but it can help to get you on the property ladder.

The good news is that paying back your mortgage is a great way to build your credit score. This means that once the CCJ or default is removed from your credit report, you will already be well on your way to building your credit. This can then help you to secure loans for home improvements.

If you are hoping to get on the property ladder with a CCJ or default, remember that it isn’t impossible. You may be required to wait a little longer than you might hope, or you might have to shop around more than another borrower, but the rewards will be worth it in the long run.

UK mortgage market is opening up for freelancers and self-employed

Since the end of the self-certification mortgage, the self-employed have had a harder time securing mortgages. This can be heartbreaking for those keen to get on the property ladder, buy their first home, or diversify their income with a rental property. According to a recent study by The Mortgage Lender, as many as 71% of freelancers said that they felt discriminated against for being self-employed.

It could be that the UK mortgage market has an image problem. One in four surveyed said that they had been put off looking for a mortgage because they assumed it would be more difficult. It’s clear that there is no shortage of horror stories about the loops company owners have to jump through in order to get on the property ladder.

In reality, there are plenty of mortgage providers who are willing to work with the self-employed. Those who are rejected by one mortgage provider would be wise to continue their search, as not all providers treat the self-employed the same way. Shopping around could be all that is needed to beat the perception that self-employed mortgages are difficult to come by.

The biggest obstacle to securing a mortgage as a freelancer or self-employed individuals is proving your earnings. While a full-time employee can simply show their job contract and pay slips, the self-employed need to provide around two-year’s worth of accounts. In some cases, the owner of a limited company might have a harder time securing a mortgage than one of their own employees.

Those looking for a mortgage might not be aware that many high street lenders regularly work with the self-employed. And as this sector of the economy grows, they are seeing this as more of an incentive to consider applications from the self-employed. In the case of sole traders who can show a steady increase in their net profit, Santander and Coventry Building Society are both great options. Both will look at your most recent year of earnings, rather than taking an average of all, which can significantly impact how much you can borrow.

Limited company traders typically fare better with the likes of HSBC and Virgin Money. Both lenders will consider your salary and your share of net profit, rather than looking solely at dividends. For those with 100% shareholdings, the options become even brighter as most lenders will look favourably on this situation.

One of the biggest problems freelancers and the self-employed face is proving their income. A common myth is that prospective borrowers will need a full 24-month’s worth of accounts to be able to apply. In reality, there are plenty of lenders that will work with self-employed individuals who have only been trading for one year.

Kent Reliance, Aldermore Bank, Kensington, Vida Homeloans and Precise Mortgages will all consider borrowers in these circumstances. Every case is considered on an individual basis, and your trading history is only one part of the picture. Lenders will also look at the size of the deposit, credit history and affordability.

Unfortunately, the self-employed are still considered higher risk, as their earnings can fluctuate more than those with a steady salary. However, some will see this as a benefit, particularly if you can show that your net profit is increasing year-on-year. For this reason, many self-employed mortgages will incur a higher interest rate. It’s still worth shopping around, as every mortgage provider will treat lenders different.

With self-employment on the rise and more people choosing to become their own boss, it makes sense that the mortgage industry is trying to catch up. While it might not be as easy as it was in the days of the self-certification mortgage, where borrowers could just state their earnings without providing any evidence, the mortgage industry is heading in the right direction. There still needs to be a balance between responsible lending and fair treatment of freelancers.

What’s important is that lending is fair and responsible, as no one wants to see another market collapse as the result of irresponsible lending. The good news for freelancers and the self-employed is that mortgage providers are starting to catch on. There will always be mortgage brokers that specialise in working with the self-employed, but the high street banks are also starting to keep pace which is making the industry more competitive.

If you’re a freelancer and thinking about getting a mortgage in your first year of trading, the best thing to do is to shop around and speak to many different mortgage providers. Work on building a strong credit score, clear your short-term debts and focus on saving for a larger deposit. It might not be equal footing with salaried workers just yet, but the good news is that the market is heading in the right direction. Shop around and don’t take a single rejection as a sign that you cannot secure a mortgage.

CCJs should not block customers from affordable finance

A CCJ, or County Court Judgement is an order by the court to repay your debts. They occur when creditors take a debtor to court if they are behind on their repayments. Before a CCJ is applied, the debtor has the opportunity to repay their debt within a certain timeframe to avoid a CCJ. If they are unable to do so, they will be forced to create a repayment schedule that is based on affordability. A record of the CCJ will remain on the individual's credit report for six years, but in reality, they are left suffering for much longer than this.

Easy target for irresponsible lenders

Since many responsible lenders will reject credit applications from those with CCJs, this opens the door to unscrupulous lenders to target the vulnerable. High-interest loans with obscure terms and debilitating late payment fees can make a bad situation worse for someone with a CCJ on their record. Through no fault of their own, they can be tricked into becoming an irresponsible borrower simply because they do not have access to affordable credit.

Suffering continues long after it is cleared

Individuals with a CCJ on their file will have to wait six years to see it removed. And even after it has disappeared from their credit report, they still have to contend with six years of poor credit history. Credit reporting relies on one thing: borrowing. If you do not have a history of borrowing money and making regular repayments, then your credit history will be poor. In fact, someone with no debt at all will often have a lower credit score than someone with lots of debt, even if the former is acting more responsibly than the latter.

Punished twice

Individuals with a CCJ on their credit report are not just blocked from affordable lending in the form of loans and credit cards. They can also find it a lot more difficult to get a mortgage. This can trap individuals in the rental market and make it more difficult to get on the property ladder in future. With the cost of rent rising, people with CCJs can find that they are punished twice. If they are able to secure a mortgage, they will need to put up a larger deposit or accept higher rates of interest.

Perceptions are changing

Mortgage providers are changing their ways and there has been an increase in the number of adverse credit history mortgages available. However, most high street lenders will automatically reject applications from those with CCJs. This leads to the unrealistic perception that CCJs exclude individuals from getting a mortgage, particularly when individuals aren’t aware of the existence of specialist mortgage providers. Perceptions are changing, but there is still a long way to go to ensure that people aren’t locked out of affordable finance. For example, lenders should look not only at the presence of the CCJ but the CCJ amount and the number of CCJs on record.

Imagine an individual loses their job and has short-term financial problems that lead to a number of CCJs. After securing another job, they repay the CCJ ahead of time and are financially stable again. It seems unfair that this person should be locked out of affordable finance when they have a steady income and an otherwise gleaming credit history. It isn’t only those with CCJs, IVAs and defaults who suffer. Even the self-employed can struggle to obtain credit as a result of their status.

Mortgage providers have a responsibility to ensure they are offering a range of products to all customers and not excluding people based on adverse credit history. And this should include taking into consideration individual circumstances, current affordability and evidence of responsible borrowing.

Newcastle BS expands self-employed mortgage range to Help to Buy and buy-to-let

It’s a common misconception that there is a specific mortgage for the self-employed. In reality, the self-employed are given access to a smaller range of lending products, but once they pass the initial checks, they are treated the same as any other borrower. The good news is that Newcastle Building Society is expanding the range of mortgages available to the self-employed. This marks a huge step forward for the self-employed community, which is growing every year.

This new range of mortgages is specifically designed to help the newly self-employed. This means that anyone with one full year of accounts and with under two years of trading history will be eligible. The newly self-employed will now be able to access the popular Help to Buy mortgage and a buy-to-let mortgage.

The new range of mortgages

The Help to Buy mortgages will feature a pair of two-year fixed rate products at 75% LTV (loan to value). It is hoped that the Help to Buy scheme will help first-time buyers to get on the property ladder while the buy-to-let mortgage will help more self-employed people to diversify their incomes by becoming landlords.

More help for the self-employed

With more people choosing to go down the self-employed route than ever before, the mortgage industry is struggling to keep pace. Some lenders, like Newcastle Building Society, will also look to other evidence of income to help support and application. This means they will consider future work contracts or retainers as proof that your income will continue as normal or increase. They also recognise that income will not be the same for the self-employed as it is for salaried workers. All of these steps help to make it easier for the self-employed to access the same financial products as everyone else.

What happened to self-cert mortgages?

The self-cert mortgage has been banned in the UK since 2011. Before the credit crunch, the self-employed could secure a mortgage by simply stating their earnings. No proof was required, and this led to some people cheating the system and borrowing more than they could afford. As a result, this type of mortgage has now been banned and the self-employed have to provide evidence of earnings. Unfortunately, the new checks unfairly penalise the self-employed for choosing to be their own boss.

Move to individual assessment

The new products launched by Newcastle Building Society were also accompanied by a shift in the way self-employed individuals are assessed. Rather than enforcing a blanket list of requirements and automatic exclusions, the Building Society has committed to considering every applicant on their own merits. This is a unique approach to self-employed mortgages that is not yet widespread in the industry.

How to increase the chances of securing a mortgage

The self-employed face a unique challenge as the mortgage industry struggles to keep pace with the changing workforce. In the meantime, there are steps individuals can take to increase their chances of securing a mortgage. First, self-employed individuals should shop around and not assume that one rejection means that all providers will reject them. Second, they should pay close attention to their credit scores and make any corrections before submitting an application. And finally, they should make sure their accounts and up-to-date and accurate, as this is the only measure of income that a lender can consider.

While it might be more difficult, it is in no way impossible to secure a mortgage when you are self-employed. You may need to just through a few more hoops, but if your dream is to own a home, then it will all be worth it in the end.

Newly Self-employed: How To Secure A Mortgage

The process of buying a home is complicated at the best of times. Throw self-employment into the mix and you’ll have a recipe for months and months of headaches. The reality is that there isn’t a specific type of mortgage for the self-employed. It’s just that they are treated quite differently from their salaried counterparts.

Imagine those with a full-time job being asked to produce two year’s worth of payslips. Or being asked to have a chartered accountant present their tax return. Or being asked to explain the increase in earnings following a pay rise. Or having their payrise disregarded in favour of taking an average of their last few years of earnings. It sounds ridiculous, but this is what self-employed people face every day. Business owners who run a limited company can often find it more difficult to secure a mortgage than the very same people they employ.

If you’re self-employed and want to take the stress out of sourcing a mortgage, follow these simple steps to get everything in order.

Do your research

While it’s true that there is no such thing as a “self-employed mortgage” there are some mortgage providers who are more inclined to lend to the self-employed than others. It’s not true that you should ignore the high street in favour of niche mortgage lenders. In fact, Santander and Coventry Building Society both have a strong track record of helping the self-employed to secure mortgages. If you run a limited company, you should consider HSBC and Virgin Money. Be sure to shop around and don’t assume that one bank turning you away means that all banks will turn you away.

Get your finances in order

It’s common for the self-employed to make legal adjustments to their tax in order to lessen their tax bill. When you are thinking about getting a mortgage, you want to avoid doing this. Many mortgage providers will base your earnings on how much you declared in your tax return. They might look at the last year or the last two years. You want this number to be as high as possible without lying as this will increase your chances of being able to borrow more.

Most mortgage providers will want to see at least two years of accounts. However, an increasing number are satisfied with 12 months if you can show evidence of future earnings. Some will even take employed earnings into consideration if you are working in a similar industry. For example, if you used to work for a company and then switched to contracting and work for the same company, this can count towards your evidence of earnings. This will depend on the lender, so if you are in this unique situation, you should make sure you shop around.

Clean up your credit report

Most people don’t even think about their credit report until the times comes when they need it to work for them. You can’t fix what you can’t see, so make sure you are signed up with all of the major credit reference agencies. These are Experian, Equifax and Callcredit. Once you can see how each credit reference agency views your file, you can move forward with confidence.

Fix any issues with your credit report and make sure all addresses are up to date. If there are any accounts still open which should be closed, make sure you get this seen to. If you don’t have much credit history, a credit card with a low limit can help. Spend a little every month and pay it off in full. This helps to build a history of making payments and makes you a safer borrower.

If you are self-employed, getting a mortgage might be a little more complicated, but it is possible, so you needn’t give up on your dream of home ownership just yet.

Mortgage lenders' income requirements for the self-employed

If you’ve found this page, chances are you are concerned about being accepted for a mortgage because you are self-employed. In this article, we will explore some of the things mortgage lenders are looking for when they make lending decisions and advise on ways you can help ensure your self-employed mortgage application is successful.

Mortgages for the self-employed used to be a lot simpler and had a higher acceptance rate. Self-employed individuals could self-certify their income to lenders, effectively giving borrowers the control to decide how much they should be allowed to borrow. These mortgages were often abused by people in order to borrow more than they could afford. They were subsequently banned in the UK following the credit crunch.

Self-employed mortgage

Now, self-employed borrowers need to prove their income in order to be accepted for a mortgage. This makes it difficult for the newly self-employed, as lenders will often take an average of their last few years of income when making a decision.

While mortgages for the self-employed might seem harder to come by, it isn’t impossible. If you are determined to get on the property ladder, there are always mortgage providers who will be willing to help you if you are able to jump through their hoops.

Income requirements for sole traders

Income requirements for sole traders

As the name suggests, sole traders are one-man bands. If you set up your self-employed business as a sole trader, then calculating your income will be much easier as all company profit is yours to keep.

When considering your income, mortgage lenders will usually want to see at least 2 year’s worth of accounts. They will usually ask to see your SA302 form from HMRC. This is your end of year tax document which outlines your income and expenses and your tax liability.

Most mortgage lenders will either calculate your average income for the past two years if the most recent figure is higher. They might also just consider the most recent year’s total income. Some lenders will ask to see SA302 forms for the past 3 years and work out the average of all 3.

Income requirements for company directors

Income requirements for company directors

If you run a limited company, you will likely have a few different income sources. Most company directors take a basic salary and then dividends. Some directors choose to leave profit in the company, so it’s important to find a lender that understands these different income sources and will take them into consideration when making your lending decision.

From our experience of working with self-employed mortgage providers, we have found that Virgin, Woolwich, Clydesdale, Kensington, the Halifax and the Coventry are all open to applications from self-employed individuals. What’s important is that you speak with a mortgage advisor as soon as possible as they will be able to help you to understand your options. You might be declined from one lender and accepted by another, so don’t take an initial setback as a sign that you cannot get a mortgage.

Understanding your income

Understanding your income

Your turnover is not your income, so don’t be caught in this common borrowers trap. Lenders will only look at the taxable portion of your income, meaning your profit.

Very few lenders will accept sales projections in lieu of the whole two-year’s worth of accounts, so it’s best to wait before applying for your mortgage. It doesn’t seem fair that you have to be running a business for 2 years before getting a mortgage, whereas a full-time employee only needs to have a job for around 3-6 months before applying. It doesn’t seem fair but company directors will have a hard time getting a mortgage while the people they employ will have it much easier.

What is an SA302 statement?

What is an SA302 statement?

When you file your tax return with HMRC, you will be provided with a calculation of your tax liability in the form of a SA302. This provides lenders with evidence of your earnings. A common problem that people face is that they sometimes legally adjust their income in order to pay as little tax as possible, but when it comes to getting a mortgage, they want to inflate their income as much as possible. If you are planning to apply for a mortgage, it is best to be upfront and honest about your earnings.

You can request your SA302 on your online government portal account, or you can request one be sent to your home. Requesting one by post can take up to 2 weeks to arrive. It’s best to have an accountant help you prepare your accounts for a mortgage assessment as they will know what steps to take to give you the best possible chance of securing a mortgage, However, it’s important that you understand your income and can explain things like seasonal fluctuations and dips or peaks in income when asked.

Do I have to get a SA302?

No, but it is often the easiest option. Most lenders will either accept your SA302 as provided by HMRC, or a tax calculation that was taken from professional accounting software. If you have your own accountant, they will usually be able to help you to prepare your accounts for a mortgage application. It’s always best to have the documents ready before you start your mortgage application as it can hold up the process.

What if I don’t have two year’s of accounts?

Very few lenders will accept self-employed borrowers with less than one year of trading history. You might have a very strong start to your company followed by a slump in sales. If you nearing the end of your second year of trading, it’s possible that a lender will consider your application if you also have a strong credit history, an existing relationship with the bank, or a healthy deposit. Every self-employed person is different, so the best first step you can take is to speak to a mortgage advisor who will be able to determine which lenders are most likely to accept your application.