Securing a mortgage can be challenging for someone who is self-employed. Some mainstream lenders perceive self-employed borrowers as higher risk than salaried employees. They often require additional evidence and proof of documentation and financial planning.
Challenges faced by self-employed borrowers
The major challenge faced by self-employed borrowers is proving that they have a stable income. It’s an important step to assure the lender that you are not high-risk as a borrower. Variations in your income can make this more difficult. There are also checks (commonly known as stress checks) in place to ensure that the borrower can afford the mortgage (up to 3 percentage points higher than the stated reversion rate). Lenders also require detailed financial documentation.
To build and sustain a good score, ensure you pay your bills on time and minimise your use of credit, ensuring you borrow less than 50% of your available credit.
Solutions for securing a self-employed mortgage
Maintain a strong credit score Before you apply for a mortgage, especially as a self-employed person, it's essential to maintain a good credit score. A strong credit rating can help you secure a decision in principle from a lender. To build and sustain a good score, ensure you pay your bills on time and minimise your use of credit, ensuring you borrow less than 50% of your available credit. Registering on the electoral roll can also positively impact your credit score. Additionally, refrain from applying for new credit in the months before your mortgage application to avoid multiple hard searches on your credit report.
Keep and present detailed financial records When applying for a mortgage, maintaining accurate and up-to-date financial records is crucial. Lenders typically prefer to see a consistent income history over the past two to three years. To be well-prepared, keep detailed tax returns for at least this period, although having additional years can be beneficial. You should also ensure that your profit and loss statements are precise and current.
To strengthen your mortgage application, aim to reduce your expenses for at least three months before applying to improve your affordability. Additionally, provide a comprehensive set of documents, including bank statements and proof of current and future work, such as contracts. This thorough documentation will help demonstrate a reliable income and support your mortgage application.
Save for a larger deposit Having a larger deposit will help you to increase your chances of acquiring a mortgage because the lender’s risk is reduced. It can also improve the mortgage terms and help you to find a more suitable deal.
Obtain an Agreement in Principle (AIP) Securing an agreement in principle demonstrates to lenders that you are serious about obtaining a mortgage and can help speed up the process.
Consider specialist lenders Specialist lenders and private banks often offer mortgage products designed specifically for self-employed individuals. These lenders typically have a better understanding of self-employed income structures and may provide more flexible terms.
Seek advice from a financial adviser Securing a mortgage as a self-employed worker presents challenges. But, with the help of an experienced mortgage adviser, you can simplify the process and obtain professional advice that can help you to navigate the mortgage options suited to you and your financial situation.
Call our team today to discuss your mortgage options.
