As if there isn't enough stress in being self employed, freelance or a contractor, persuading a mortgage provider to lend you the necessary money to buy a property is now an additional concern of many people who have chosen this career path. In fact, new research shows that 2 in 5 of those who have (or intend to have) a mortgage in the future are worried they might have difficulty arranging finance because of their working status.
National Labour Market figures from the Office of National Statistics show that one in seven of the UK's working population is now self employed but many of this group will certainly feel that they've been given the cold shoulder by the mortgage industry in recent times.
So what has gone wrong and why are such a large proportion of 'national heroes' (to coin the phrase used by Prime Minister David Cameron for this group), unable to access a mortgage in the same way employed people can?
Self cert mortgages and the Mortgage Market Review
Before the credit crunch, self certification or 'self cert' mortgages were available to the self employed where little or no evidence of earnings was required by mortgage providers. However, self-cert whilst convenient and easy for the self-employed to use, was sadly abused in some cases.
Roll on to April 2014 and the mortgage industry's new rules (the MMR or Mortgage Market Review to give it its formal title) have made it pretty tough for anyone with non-standard earnings to get a home loan - including the self employed, older borrowers and so called 'mortgage prisoners'. (See mortgage misfits infographic).
The new rules weren't intended to freeze the self employed out of the mortgage market but simply to prevent excessive borrowing, ensuring that homeowners can pay back their loan should interest rates rise in the future. For mortgage providers, there is increased complexity in understanding whether a self employed person can truly afford their mortgage, which is why some providers have been deterred from lending to this group.
Self-employed with a deposit and good repayment history
Being self employed is clearly no bellwether for having either a healthy deposit or good mortgage repayment history: as with fully employed people, circumstances differ vastly from one self-employed person to the next.
However, many mortgage providers are heavily reliant on computer based assessments and so there is no flexibility to consider each case individually. If an applicant is unable to prove a regular income in the form of salary slips, then the provider may turn them down automatically, regardless of their deposit and repayment history.
'Evidence' and 'manual underwriting' are the key to accessing a self-employed mortgage
Over three quarters (77%) of self employed people said that they were concerned about not being able to shop around to arrange a mortgage as there are only a handful of companies that are likely to lend to them. These limits on choice and accessibility are unfortunately currently justified but various organisations who represent the self employed are calling for a full review to help rectify the situation.
In the meantime there are steps that self-employed applicants can take if they need a mortgage sooner rather than later:
- have their work/business accounts signed off by a suitably qualified accountant and importantly obtain a certificate confirming this the more years they can provide the better but some providers will consider applications with just one or two years’ accounts
- obtain SA302s for the same period this is a receipt from the HMRC confirming their earnings
- if they are approaching a year end, have predictions of their year end position
- have credible earnings/business forecasts in place to show earnings are likely to remain at the same level or above in future years
- provide evidence of previous contracts and evidence of time remaining on current contracts
- provide evidence of work history in the same field (prior to becoming self employed, freelance or a contractor)
- this is all in addition to the usual documentation required by mortgage providers such as bank statements, evidence of child tax credits, balances of other outstanding loans, credit cards etc.
Self-employed applicants should also:
h. seek out a mortgage provider who is prepared to assess their mortgage application on its individual merits
The latter is known as manual underwriting which means real people review the initial mortgage application which will be beneficial to self employed applicants and hopefully avoid the standard 'computer says no' response.
Finally self-employed people with particularly complicated applications may do well to seek out a mortgage broker who has experience in this market; they will have expertise in packaging the case for the mortgage company who might otherwise have rejected the application.
Jumping through hoops
Nearly two thirds (63%) of self employed people believe that mortgage providers expect them to jump through more hoops than employed people during the application process. The reality is that all mortgage applicants, whether employed or self employed, are now expected to provide robust evidence of affordability. Therefore it is vital that the self employed only apply for a mortgage once the appropriate evidence is available and that they select a provider who values human judgement over computer underwriting.
Ipswich Building Society prides itself in offering mortgages to people who don't necessarily fit the normal lending criteria - it calls these people 'mortgage misfits'. The Society's qualified mortgage professional are experts in understanding and reviewing mortgage applications from the self employed
It doesn't promise to lend to anyone and everyone but it does promise that a qualified mortgage professional will consider all applications on an individual basis.
Sixty-one per cent of self employed people believe that many mortgage providers don't fully understand their business and therefore their mortgage application but Ipswich Building Society's qualified mortgage professional are experts in understanding and reviewing mortgage applications from the self employed. The Society prides itself in offering mortgages to people who don't necessarily fit the normal lending criteria - it calls these people 'mortgage misfits'.