Buying your own home is an incredible experience. It offers great financial freedom and you can finally be free of the constraints of the rental market. Unless you have the funds to buy the home outright, in order to buy your own home, you will need to get several things in order and secure a mortgage. Lenders will usually want to see proof of earnings, a deposit and a strong credit history. For the newly self-employed, this becomes all the more difficult.
In the not too distant past, self-employed individuals could get something known as a self-cert mortgage. This meant that they could simply state their annual earnings to a lender without any proof. Provided they had a deposit and good credit history, their chances of being accepted were strong. The problem with this type of mortgage is that some people were dishonest about their earnings and borrowed more than they could afford. Following the credit crunch in 2007, this type of mortgage was banned in the UK, although some European banks still grant self-cert mortgages.
What does this mean for the self-employed?
Self-employed individuals and business owners now need to jump through a lot more hoops than before. While it might seem more difficult, it’s important to remember that it isn’t impossible. If you are turned down by one lender, this doesn’t mean that you will be turned down by all lenders.
When applying for a mortgage, self-employed individuals now need to present their lender with two-year’s worth of accounts. This is usually in the form of accounts prepared by your accountant or a SA302 tax calculation. Self-employed people might also need to secure a larger deposit and show evidence of future income.
What if I don’t have two-year’s of accounts?
For the newly self-employed, this can make getting on the property ladder more difficult. If you have very recently switched to self-employment, then you are unlikely to be able to apply for a mortgage before the end of the two years. This is because lenders need to see proof of income, and they will only accept past accounts as evidence, not future contracts. If you have a choice, going back into full-time employment might be the best choice if you really can’t wait the two years. In this instance, a lender would want to see that you have been in full-time employment for at least 6 months, so this could significantly shorten your wait.
What if I have 18 month’s worth of accounts?
If you almost have two-year’s worth of accounts and proof of regular income, some lenders will allow you to make an application based on projections of your future income. If you earn roughly the same every month and you haven’t lost any business, then it’s easy to see how the next 6 months of the year might pan out. This all depends on the lender, so it’s worth shopping around for a niche mortgage lender that specialises in self-employed mortgages.
What if I’m thinking about going self-employed?
If you haven’t yet made the plunge and you’re also thinking about buying a home in the next two years, then you might be better off staying put until you have purchased your home. Remember that being self-employed means that you may not always have the same income every month, so taking on a mortgage might feel like a bigger risk. However, if you are confident that your freelance business will quickly replace your income this shouldn’t be a problem.
What can I do to improve my application?
One of the biggest mistakes people make when applying for a mortgage as a freelancer is that they underestimate their earnings. It’s common for freelancers and the self-employed to make legal adjustments to their earnings in order to pay a little less tax. While this is completely normal, when you are applying for a mortgage this can work against you. If you are planning to apply for a mortgage in the next few years, make sure that you keep your tax records accurate and up-to-date or you could end up being offered less money.
Another mistake that people make is starting the application process without checking their credit score. Your credit score is vital to the application, so it makes sense to have a good idea of what lenders will see before you apply. If there are issues with your credit file, you can work towards getting them amended before you make your application. If you fail to do this and you are denied credit, this will also show up on your file and may influence decisions from other lenders. For this reason, it’s always best to check your score before you apply.
And finally, one of the best ways you can improve your application is to secure a larger deposit. This will make you a much lower risk lender and more likely to have your application accepted.