The ability to work flexibly has led to far more people becoming self-employed. In fact, official statistics indicate there were more than 4.8 million self-employed workers in 2018, a figure that’s likely to increase further. Whilst the flexibility it offers can certainly be appealing, it can make securing a mortgage to get on the property ladder challenging.
If this is a position you find yourself in, there are things you can do to improve your chances:
This is a step all those applying for a mortgage, whether self-employed or not, should take. Your credit score plays an important role in the mortgage process. It’s used by lenders to indicate how likely you are to consistently meet repayments. A score that is deemed too low or risky may be rejected.
When you start thinking about taking out a mortgage, checking your credit score should be an essential step. The main credit agencies in the UK will give you your score and a snapshot of the credit report for free online. With this in hand, it’s time to look to see if there are any negatives influencing your score, and where possible, improve it. In some cases, there are easy wins to be made, such as closing an old account or registering on the electoral roll, others will take more time. It’s advisable that you look at your credit score at least three months before you hope to apply.
Mortgage lenders will want to know that you have a good handle on your finances and can meet the mortgage commitments each month. This will usually mean providing three months of transactions from your bank accounts.
Whilst this can be a nerve-racking experience during the mortgage process, lenders are usually looking for red flags. These may include loans from payday lenders and gambling, for instance. However, it’s worth keeping in mind that your accounts will be looked at when applying for a mortgage. Limiting big spending in the few months beforehand may help you secure a mortgage.
All mortgage applicants need to prove their income, but this can be more challenging for self-employed workers. Rather than handing over three to six months of pay slips, ensure you have your accounts in order. If you’re working for yourself, you can expect lenders to delve a little deeper to assess your ability to meet repayments. Typically, you’ll need to prove your income over the last two to three years.
How lenders will use this information will depend on their own process. Some may take your lowest annual earnings whilst others will use an average to assess how much you can borrow to purchase a property.
As mentioned above, your earnings will be scrutinised when you’re applying for a mortgage. As a result, considering your finances at the time you apply can help. If you’ve had a period where you’re not earning due to a holiday, for example, holding off could improve your chances. In the same way, if you often work on long-term contracts or projects, submitting an application when one of these has just been signed can also help.
First-time buyers will often need a deposit of 5-10% of the property’s value, borrowing the remaining amount. However, if you’re self-employed you may find the loan to value (LTV) that lenders are willing to offer is significantly lower. This means you’ll need to save up a larger deposit, often around the 20-25% mark. Obtaining a mortgage in principle can help give you an idea of a target deposit to aim for.
When you think of mortgage lenders it’s probably the high street providers that spring to mind. But the market is huge and there are many without a presence on the high street. Understanding the criteria of lenders means you can select one that suits your circumstances. Being turned down by one provider doesn’t mean that others will take the same view.
This is an area working with a mortgage adviser can help. Looking at the whole of the mortgage market can be daunting and you may miss out on the best deal for you. An adviser will be able to point you towards lenders that will consider self-employed individuals and that you’re most likely to be accepted by.