Are you self-employed, a contractor or a freelancer?
It can certainly give you more freedom in your working life, but it can also cause financial uncertainty, especially if you don’t always know when the next job or contract is coming your way.
Working for yourself can make it tougher to budget as your income fluctuates each month and there may be gaps in your employment at times. When you’re self-employed, you can also be seen as a bigger risk to mortgage lenders, as there’s no guarantee you’ll have a big enough income to cover your mortgage payments each month. However, that doesn’t mean you can’t get a mortgage if you’re self-employed.
What do lenders look for?
All lenders have their own criteria when deciding who to lend to and how much, but one thing they’ll certainly look at is your income. If you’re self-employed and looking for a mortgage, lenders will want to see how regular your income is to weigh up whether you’ll have enough to cover a few mortgage payments if work dries up for a month or two.
Unlike a regular borrower, who will be asked to provide a few months’ worth of payslips as proof of earnings, self-employed mortgage applicants will need to show up to two years’ worth of accounts instead.
Make sure your accounts are in order and up to date. If there are any gaps in your work history, or significant changes to your earnings from one month to another, you will need to explain them.
The lender will be interested in your average profit, rather than your overall earnings. The average profit will be what you have left over monthly once you pay any business expenses, your tax and National Insurance. Work out your average monthly profit based on these accounts after all these outgoings have been taken out, and the money you have left is most likely what you’ll use to pay other regular bills like your utilities, insurance and mobile phone contract. It’s also what you’ll use to cover expenses like travel and food shopping. If you succeed in applying for a mortgage, that will also come out of this sum.
If your average monthly profit is already stretched, you may struggle to cover your mortgage repayments. So before you apply for a mortgage, do your sums and use Ocean’s mortgage calculator to see how much your monthly repayments could be for what you want to borrow.
When you’re self-employed, many mortgage lenders will ask that a certified or chartered accountant completes all your financial paperwork to cover the last few years. So if you have been doing your accounts yourself or you’ve drafted in a family member or friend to complete them, it might be a good idea to pay a professional to go over them before you apply for a mortgage.
What if you have employment gaps?
If you have been self-employed for less than two years, you clearly won’t have enough accounts to back up your application. If this is the case for you, you may need to show what you were doing before you worked for yourself. If you were in contracted employment, use your payslips to show what you earned. If you were busy with study, or took time off due to personal circumstances, you could find that your lack of earnings hampers your chances of getting the mortgage you want.
This might not be a deal-breaker with lenders, but in order to borrow the sum you want or get a more attractive rate of interest, it might be better to put your home buying plans on hold. This will give you time to get more business accounts under your belt and improve your financial circumstances.
Bolster your mortgage acceptance chances
Other than asking to see your accounts, a mortgage provider will judge your application in much the same way they’d look at one from any other would-be borrower. It’s up to you to ensure that your credit history, deposit, personal spending, and any other borrowing agreements you have are in-line to boost your chances of being accepted for the mortgage you want.
If you are buying a property with someone else, remember that their income is also taken into account. If they are in secure and regular employment, their income might improve your chances of getting a mortgage.
To give yourself the best chance of being accepted for a mortgage, consider what lenders are looking for. Here’s a quick checklist:
Check your credit history using the free credit checking services offered by ClearScore and Noddle. This lets you see what your lenders see. Missed payments and CCJs make you look like a risky borrower and could stand in your way of getting a mortgage. Do your best to avoid them by keeping up to date with your repayments. You could set up a Direct Debit to make your minimum payments on your credit card or your monthly payments on a loan to make sure you don’t forget about them. If you notice any errors on your credit history, like a former address listed as your current one or an account that should be closed, contact the credit reference agencies to get this corrected.
Don’t apply for new credit
In the lead-up to your application, it’s better to pay off as much of your other borrowing as you can. You should also avoid applying for new credit. Lenders want to see that you aren’t overstretching yourself financially, so try to pay off as much of your balance as possible.
Manage your outgoings
Lenders take an interest in all aspects of your spending, including outgoings you may not even think they look at like petrol, groceries, gym membership, and so on. They will consider all your outgoings on a day-to-day basis. If they feel that a lot of your spending is going on non-essential luxury items, they may expect you to cut down on this to free up money to cover your mortgage repayments when they start.
Save a good deposit
The bigger the deposit, the better chance you have of getting the mortgage you want. The greater the proportion of your new home you can pay for yourself, the less you will need to borrow, and the less risk you’ll present to the lender. Simply put, having a large deposit means you may either be able to borrow more than you thought, or you’ll be offered a more competitive rate of interest.
Either way, be sure to weigh up how much you want to borrow against your earnings and outgoings to give yourself a clear idea of what’s left over for your monthly repayments.
For further advice on how to boost your chances of getting a mortgage, click here.
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By Christos Stylianou