Self-employed? How to ensure a smooth mortgage application process
Over recent years, the number of people turning to self-employment and contract work over full-time employment has been rising. So much so, the Office for National Statistics (ONS) has stated that almost five million people – or 15% of the labour market – now class themselves as self-employed.
Traditionally, this sector of the workforce has been under-served by the mortgage market. However, given this changing employment landscape, banks, building societies and a new raft of specialist mortgage lenders are beginning to recognise the needs of the self-employed.
As a result, many lenders have begun to tailor their borrowing criteria, such as their requirements for evidence of work history. Changes like these have led to an 11% increase in the loans taken out by self-employed workers in 2016 alone, according to the former Council of Mortgage Lenders.
So, with the mortgage industry starting to cater for the needs of these workers, what can self-employed individuals do to take advantage of these new products and make sure their mortgage application is as smooth and trouble-free as possible?
Start with the basics
First and foremost, self-employed workers need to gather all of the relevant documents required for their mortgage application in one place. In particular, lenders will want to know how you receive your income, especially if it is from multiple sources, so it is imperative you have an up-to-date record of your audited accounts.
At Kensington, we ask for one year’s worth of accounts and would look for income verification through an individual’s evidence of their earnings, or what is called an SA302. It could also be a qualified accountant’s reference and finalised accounts. If you are self-employed, you should also be able to explain any fluctuations or discrepancies in your income, as this information can increase your chances of being accepted for a mortgage.
Having a good credit score will also help. There are a number of things you can do to improve your score, and this is especially important if you might have had a financial hiccup in the past or don’t have a credit history at all. For example, acquiring a credit card and ensuring you make the repayments on time will show lenders that you can manage your finances responsibly.
There are also specialist lenders in the market that will consider those with an adverse credit history, depending on the circumstances. Others may not credit score individuals, focusing on underwriting the person instead.
Contractors, sole traders and limited companies
Along with details of a borrower’s work history, lenders will want to ensure these individuals will also have work in the future. For contract workers in particular, evidence showing the potential for a renewed contract, the minimum number of months left of the existing one, or a new agreement with another employer will normally be required. As such, we recommend that self-employed applicants have an updated CV on hand when applying for a mortgage.
It is also important for self-employed workers to consider the set-up of their business when applying for a mortgage. For those registered as a sole trader, for example, lenders will want to see verification of their business profits when assessing their income. In this case, having a copy of your SA302 will be helpful.
In contrast, if an individual has set up a business as a limited company, they will probably receive their income in the form of dividends, in addition to their basic salary. If that’s your situation, it’s essential you and your mortgage adviser make sure the lender takes both of these elements into consideration when assessing mortgage affordability. For this reason, individuals who run a limited company should include both their name and the name of their company on all relevant documents in order to make this connection clear.
Getting advice is essential
It’s always a good idea to speak to an adviser when applying for a mortgage, but for the self-employed, this advice is invaluable. With their knowledge of the sector, brokers will be able to explain which lenders and mortgage products are available and which suit your individual needs, as well as the specific criteria that each lender requires for a mortgage application.
Getting a mortgage application approved may seem like a challenging process if you’re self-employed. However, speaking with an adviser can help you to navigate these waters much more easily, as they will understand your particular needs and direct you to lenders in the market that are there for borrowers in these circumstances.
As a borrower, you will need to have all the relevant financial documents to hand and ensure that any information you provide is clear, concise and suited to what the lender requires. By making time for this little bit of preparation, you will have a much smoother journey and a better chance of securing the mortgage you need.
Steve Griffiths is director of sales and distribution at Kensington Mortgages