SAVING for a deposit and buying a home can be a stressful process – and self-employed workers can find it even more difficult.
According to specialist mortgage company The Mortgage Lender, people who are self-employed are twice as likely to be rejected for a mortgage as those in a salaried job.
When a mortgage provider is deciding whether to lend you money, it carries out an affordability assessment to see if it thinks you can cope with monthly repayments.
And self-employed people are often given stricter affordability assessments because they typically don’t earn a set amount each month, meaning lenders seem them as riskier.
This can make it trickier to get through the mortgage process.
The Mortgage Lender’s found that 19% of self-employed people who have applied for a mortgage have had mixed results, compared to only 11% of employed individuals.
But that doesn’t mean it’s impossible to get a mortgage if you’re self-employed, you might just need to jump through a few more hoops.
Steve Griffiths, sales and product director at The Mortgage Lender, has revealed his top tips to buy a house if you are your own boss.
Speak to a mortgage advisor
Traditional banks use a set system to work out whether you’re eligible for a mortgage.
And that means self-employed people can often find themselves at a disadvantage – it’s a “computer says no” scenario.
Contacting a mortgage advisor will give you more options as they can look for deals at specialist lenders if you’re struggling with high street mortgage providers, Steve said.
Mortgage advisors have relationships with different lenders and will be able to give you a good picture of what products are on the market, and which might be available to you.
This isn’t something you need to pay for either.
Companies including Habito, London & Country and Trussle will hunt for a mortgage for you for free because they are paid by the mortgage companies when they secure a deal, not by individual customers.
They’ll ask you lots of questions about your financial situation and can then search the market so you don’t have to.
Get your accounts up to date
Before you start house-hunting, it is useful to know roughly how much you might be able to borrow for a mortgage, Steve said.
“It is about separating out what you think your income is, because that’s what you live on, and what is actually provable to a lender,” he explained.
This is straightforward if you receive a payslip each month, but more complicated if you’re self-employed.
You’ll need to either produce a set of accounts for your business, or be able to show lenders your tax return.
Typically, providers will make a decision about how much they are willing to lend you based on the last two or three years of accounts, Steve said.
But this means if you are a growing business, you may struggle because your initial years might have been fairly modest.
“It’s understanding where you are on that journey,” Steve said.
“Have you been running a business that’s actually had the same income year in, year out for the last seven or eight years?
“Or have you just started the business and you’ve only got one set of accounts – something which is very common.
“Once you understand that, you can get in front of a mortgage broker with up-to-date accounts which reflect your current financial situation.”
Specialist lenders might be more open to taking into account your individual circumstances and allowing you to only use your most recent accounts.
For example, if your business did really well before the Covid pandemic, but struggled in 2020 and 2021, it might be worth producing a partial set of accounts for the current year to show that you are on the up again.
Tidy up your finances
Even if you’re not thinking about buying a house immediately, get into good habits with paying debts on time and setting a budget.
This will provide good evidence for when you do want to apply for a mortgage.
For example, not going over your overdraft and picking up excess charges, shows that you are managing your finances responsibly.
“Again, it may be worth speaking to a mortgage advisor, even if you know it will be 18 months until you want to apply,” Steve said.
“They can give you a sense of what you need to do and you’ve got time to get your ducks in a row.”
It is really important that you don’t borrow more than you can afford to repay, as if you miss mortgage payments then your house can be repossessed.
Think about timing
Be strategic about when you apply for a mortgage – it might be worth paying off a credit card or clearing outstanding debt before you start the process.
“If you’ve got a car loan or other unsecured credit, mortgage lenders deduct that from your income, which affects the amount you can borrow,” Steve explained.
“It isn’t forensic – a lender won’t ask what you spend in Tesco – but it’s about understanding your general expenditure and if you have the capacity to afford what you want, or if you’re trying to push yourself.”
He also suggested thinking about when you invest in the business, and how much it might cost you.
“Someone might think, I’m going to get really kitted out and buy new tools, but it might cost them another £400 a month to pay for it.
“If you could put up with what you have for another year or two, that could be another £5,000 or £10,000 a year, which could enable you to borrow a lot more.
“That could be the difference between actually getting the house you want or not.”
Each week UK Times speaks to first-time buyers about how they got on the property ladder in its My First Home series.
One young buyer told us how she picked up a second job pulling pints to buy her first home, and another couple raised £3,000 for their deposit by selling their old junk.
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