“if you’re self-employed and your income varies from month to month, you may not have an exact figure of how much you earn...”
When you come to apply for a loan, lenders will want to know your employment status, as well as how much you’re earning. How in-depth the questions are that you’re asked will vary from lender to lender, so you may not be asked what your job is or if you’re self-employed or not.
One problem you could have is that some lenders will just ask you how much you earn every month, particularly if you’re applying to borrow a relatively low amount. If you’re self-employed and your income varies from month to month, you may not have an exact figure of how much you earn. In this case, it’s usually acceptable to give an average figure so work this out from your last three months of earnings.
If you’re applying for a bigger loan, to carry out some improvements to your home, for example, the lender might need to go through your finances in more detail. They may need to see your last few bank statements or maybe proof of your earnings for the last year or so. If you have any doubts, it’s best to get in touch with your lender and ask what their requirements are for loan applications.
Bear in mind that these types of loans are usually secured against your property, so you’ll only be able to apply for one if you own your own home. If you don’t keep up with your repayments, your home could be repossessed.
“lenders might not be willing to let you borrow if your income isn’t guaranteed or if it varies every month...”
Mortgages and self-employed
While getting a loan when you’re self-employed usually isn’t too much of a challenge, mortgages can be a bit trickier. Since the introduction of the Mortgage Market Review (MMR) in 2014, lenders have tightened up their affordability checks to try to ensure that they never let people borrow more than they can afford to repay – which is a good thing of course!
This may make life harder for you if you’re self-employed, as lenders might not be willing to let you borrow if your income isn’t guaranteed or if it varies every month. That’s not to say you won’t be able to get a mortgage at all, but you be better off speaking to a mortgage lender or broker who specialises in mortgages for people who are self-employed.
Lenders will want to go through your finances and they may also want to see your track record for getting work. For example, if you’ve been working in your field a while and you’ve consistently had a set amount of work every month, they may be more likely to lend to you than if you’ve just started your career and can’t prove how much you’re likely to earn.