When you’re employed, things like your P60s can easily demonstrate what remuneration you’re getting and tax you’re paying when applying for a mortgage, but there’s more difficulties if you’re self-employed.
The nature of self-employment is that your income can be a lot less predictable, particularly in the earlier days, and lenders will naturally require a lot more convincing that you’re good for making timely home loan repayments.
So you can expect more in-depth income checks when applying for a mortgage and for the process to take perhaps weeks longer as your prospective lender investigates your historically declared earnings. Sadly, this has often derailed a planned home purchase because a seller, fearing a lengthening delay before you get your mortgage offer, might pull out before you can finish your conveyancing process.
Given all this, how can you put your best foot forward regarding potential mortgage lenders and finding a mortgage that’s right for you? Here’s our 5 top tips:
1. Chalk up that first year of self-employment
You’ll find it virtually impossible to get a mortgage lender to consider your application if you don’t have a year’s trading under your belt.
Once this milestone has passed, you’re more likely to find a lender who’ll consider passing your application to their underwriters for a risk assessment. And once you’ve got 3 years’ trading history, you’ve considerably more chance of success.
2. Always be aware of your credit score
If you’ve bought a home before and have a record of making timely mortgage repayments, the chances are you’ve already built up a good credit score and, all things being otherwise equal, your chances of getting another mortgage are greater.
You may, however, be a first time buyer and hoping to buy with a comparatively small deposit (10% or less). Depending on what else you’ve done to create a good credit record, you may often find that your score is too low for a prospective lender to consider.
Whichever situation you’re closest to, you want to ensure that you’re briefed on how lenders will likely view you in credit risk terms by getting an up-to-date credit report.
3. Offset mortgages might suit you
If you already have a bank account with a lender you’re approaching for a mortgage, you might want to consider getting an offset mortgage to reduce your monthly interest repayments.
It’s definitely a good self-employed practice to put some cash aside every month towards your yearly tax demand and as this money can generate interest, this can dovetail very well
with an offset mortgage, where the interest is put towards paying down your mortgage interest.
The other side of the coin however is that these types of mortgage products often carry comparatively higher rates of interest – you should always compare rates carefully.
4. Use a mortgage broker
There are currently well in excess of 3,000 mortgage products on the market. As a self-employed applicant, you have particular requirements so it therefore may well be worth getting an expert to help you choose the right product for you and one where you’ll have a reasonable chance of a successful application.
An independent mortgage broker is not tied to any particular lender and can therefore access products from the whole of the market.
Depending on how they’re structured, it may even be that you don’t have to pay directly for your mortgage broker’s services. Many get their remuneration from the lender involved.
5. Assemble your previous years’ accounts well in advance!
It’s clear that self-employed mortgage applicants have to produce more evidence than employed applicants in terms of financial paperwork.
So you might as well put in the hard work at the start and gather together all the relevant paperwork you’ll need for your mortgage application, focusing on your previous 3 years of financial accounts or tax returns as suggested by David York’s Tax Services, because you know that any lender will want to scrutinise these.
Finally, don’t be put off: self-employment in the UK is growing as a worker class comparatively and absolutely so mortgage lenders are getting increased exposure to applications from this group. As with many things in life, organisation and persistence will help you succeed.