Image taken by kevin dooley on Flickr
While there may only be a four-letter difference between the words “employed” and “self-employed” in financial terms, the difference is huge. Ultimately the employed are often perceived as being lower-risk borrowers due to having a guaranteed income. With this in mind, here are some tips for the self-employed to make themselves more attractive to lenders.
Have a substantial deposit
For those in employment, having a substantial deposit can make the difference between getting a mortgage and getting a great mortgage deal. For the self-employed the size of the deposit can make the difference between getting a mortgage and not. The deposit protects the lender both against falling house prices and against defaults. It also provides evidence that the potential borrower has been able to save money, meaning that they are able to live within their means and put aside a surplus, which is also a very positive sign for a lender.
Double-check your credit record
This is likewise important for anyone applying for a mortgage, but even more so for the self-employed. Check and if necessary correct your credit record and make time to do anything simple which will improve it, for example if you took out a credit card for a special offer and no longer use it, make the time to close it properly.
Think both backwards and forwards
Potential borrowers should be prepared to show proof of income for anything up to the last three years. For practical purposes, this means tax declarations or company accounts which have been signed off by a qualified accountant. Those who wish to use tax declarations to show income can obtain a form called SA302 for this purpose. They would be well advised to apply for this well in advance of their mortgage application, particularly if they are planning to apply for a mortgage over the winter, when the Inland Revenue is busy dealing with Self-Assessment declarations.
Having financial statements will show that you have been able to make a financial success of self-employment. It may help if you can also show evidence of future income, such as contracts with clients.
Be prepared to answer questions about your income, particularly if it has been erratic or there have been recent signs of sudden growth or sudden contraction.
Remember income means net profit
In terms of getting a mortgage, what the lender wants to know is whether or not you can reasonably be expected to meet the repayments. That means what matters to them is final net profit, i.e. the amount which is ultimately declared for the purposes of income tax. This may create a dilemma for the self-employed in that legal accounting practices which help to reduce the headline profit made by a company or individual and thereby reduce their tax liability, also reduces a self-employed person’s chances of being accepted for a mortgage. This dilemma needs to be examined on a case-by-case business as each individual will need to take their own decision.
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Keep checking the market
The market for self-employed mortgages is in a state of development. The old “self-certified” loans were not fit for purpose, but they were removed from the market without a really adequate replacement. New products and services, however, are continually being launched, for example Crowd Mortgage is due to introduce a peer-to-peer mortgage service. As this is designed to be different from the mainstream lenders, it may well be more sympathetic to the self-employed, only time will tell.
Ashely is a keen blogger who enjoys writing about money topics.