Being self employed opens up a lot of opportunities, but one thing that many self employed people worry about is their ability to get a mortgage. Prior to the 2010 financial crash, self-employed people could simply self-declare their earnings to lenders. This resulted in a lot of people abusing the system and borrowing more than they could afford. Following the financial crash, the FCA decided that lenders would now have to gather more evidence of earnings.
This has led many self employed people to believe that they will have to jump through too many hoops to be able to secure a mortgage. The good news is that this isn’t the case. If you’re self-employed and looking to secure a mortgage, read on to find out how you can make this a reality.
Find the right lender
Being rejected by one lender does not mean that all lenders will turn you down. Some are more experience working with the self-employed and will be more flexible in their requirements. This means that you might not be best placed with a well-known high street bank, but you could instead end up working with a niche lender. Finding a mortgage broker is the best way to help you navigate the lending landscape.
Prove your income
If you have recently left full-time employment to start your own business, this might not be the best time to apply for a mortgage. In general, the longer you have been self-employed, the better. Lenders will ask to see proof of income in the form of a SA302 tax calculation. This is your end-of-year tax form that will show exactly how much you have earned.
Some lenders will want to see 3 years of earnings while others will allow you to apply after just one year. If you want to get a mortgage being self employed, the best thing you can do is to find a lender that will understand your situation. They might not be very common, but they are out there. Spending a little bit of time finding the right lender can save you a lot of trouble in the long run. If you have an application rejected, you may need to wait three months for it to drop off your credit report. So finding the right lender the first time around can save you a lot of trouble.
Improve your credit score
One of the best ways that you can prove to lenders that you are a responsible borrower is to improve your credit score. Your credit report offers a complete overview of your credit behaviour for the past six years. If you’re often late making payments, this will be a huge red flag to lenders.
Improving your credit score starts with getting everything up-to-date. Make sure you’re on the electoral roll at your current address as this is the easiest way for lenders to confirm your identity and complete their anti-money laundering checks. If you’re not on the electoral roll, this can be a huge red flag for lenders.
While you’re checking your credit, you should also clean things up a bit. Old accounts you no longer use anymore should be closed to prevent them from causing problems. And finally, switch make sure you switch everything to direct debits so that you never miss a payment.
Save a decent deposit
When lenders reject applications from the self-employed, they’re not being unfair, they are simply managing their risk. When you are self-employed, your income could change drastically from one month to the next. It’s common for self-employed individuals to have months where their income is much higher, and then months where it falls dramatically.
This can make lots of lenders nervous, as a lean month could mean that you’re unable to make your mortgage repayments. It might seem unfair, but this is the reality of the situation, and it’s something that those in full-time salaried employment do not face.
To counteract this risk, you can offer a sizeable deposit upfront. By offering a larger deposit, you are effectively reducing the risk for the lender. So, the self-employed will benefit a lot from saving a larger deposit. It would be rare to find a lender that will accept a 5% deposit, so instead you should aim for 10,15 or even 20% deposit. The more you can save, the better.