You may have heard rumours that getting a mortgage when you’re self-employed is more difficult than it is for full-time salaried workers. While this may be true to some extent, but once you have jumped through the right hoops, you will have access to the same lending products as any other individual.
Mortgages for the self-employed are different because lenders can’t easily confirm your earnings. Since the entire mortgage approval process is about calculating the risk to the lender, self-employed earnings make it more difficult to assess.
With a full-time salaried employee, lenders can see their contract, payslips and bank statements as proof of income. With a self-employed person, their income may be more sporadic, increasing one month and falling the next. It’s also common for the self-employed to have income from more than one source. This makes things more difficult to assess for the lender.
If you’re self-employed and want to make your mortgage application easier, read on to discover the steps you need to make to get on the property ladder.
Messy and complicated accounts is a surefire way to make lenders nervous. Split your personal and business spending by accounts, ensuring that you never use your business account for personal reasons, and vice versa. This will help lenders to get a more accurate picture of your spending habits.
Lenders will ask to see your SA302 statement as proof of income. This is a document provided by HMRC after you file your taxes that outlines your income and tax liability. It is the best possible proof of income you can provide and this is what will be used to determine affordability. If you are late filing your taxes, this will complicate the mortgage application process and could make you appear to be an unreliable borrower.
There are plenty of perfectly legal ways you can reduce your tax liability as a self-employed worker. While this might be good news for your tax bill, it can deliver a huge blow to your mortgage application. When you reduce your tax liability, you are essentially telling HMRC that you don’t earn as much money. But when lenders are looking at this figure to determine how much you can borrow, this can be disastrous and lead the bank to assume your freelance business is not as profitable as it really is. Speak to an accountant if you need help and guidance to get your accounts in order before your mortgage application.
You can’t get on the property ladder without a deposit. And when you’re self-employed, you should aim to save as much as possible for your deposit. Your deposit helps to lower your LTV, or loan to value, which helps to lower the risk to the lender. This will allow you to access better mortgage products.
The self-employed are also eligible for help to buy schemes, so you should check if there are any relevant to your circumstances. The help to buy equity loan scheme could allow you to boost a 5% deposit to a 25% deposit. Shared ownership is also a great way to get on the property ladder and start building your future. Even if you don’t own the full property, it’s a great way to start building equity.
Navigating the mortgage market alone is difficult enough when you’re a full-time salaried worker. When you’re self-employed, some of the big-name banks won’t even consider your application. This is why working with a mortgage broker can be so helpful. A mortgage broker will be able to build a profile of you and then match this to suitable lenders. While you might have to pay broker fees, you could save a lot of money in the long run by accessing a better lending product.
With an unconventional income, one way that lenders can determine if you are a responsible borrower is by looking at your credit score. Your credit history is vital to securing a mortgage, so you should check that yours is up to date and free from errors before you apply. Make sure you don’t apply for any lines of credit at least 3 months before your mortgage application. An accepted application for credit will raise red flags just as much as a declined application.
Depending on the kind of work you do, you might be able to build an attractive application by highlighting any future contracts you have lined up. Retained contracts will also have a similar impact on your application. This will allow you to show a record of consistent earnings, but also a bright future of potential earnings.
As part of the application process, lenders will often ask to see 6 months of bank statements. This will help them to get a better idea of your spending habits, so you must represent yourself in the best possible light. Some lenders will automatically reject your application if they see evidence of gambling on your bank statements. And some will call your application into question if your actual spending doesn’t match what you have stated on your application.
It might not be election season, but you should still make sure your address is up to date on the electoral roll. You should be able to check this when you check your credit report. The electoral roll is the simplest way for lenders to confirm your address. Without this essential step, lenders may have to resort to confirming your address through other avenues which can delay the application process unnecessarily. To avoid this fate, simply head to the HMRC website and add your details to the electoral roll. This may take up to eight weeks to show on your credit report, so make sure you do this step well in advance.