If you’re a self-employed entrepreneur or the owner of a small/medium sized business, you’ll know that a getting a good mortgage deal can be a pain. On top of the impact from Coronavirus, it can feel like lenders are making you jump through an ever-increasing number of hoops before they’ll lend you any money, and even then, the deal you get may not seem that great.
But what if you’re not only self-employed, but you also have a history of bad credit. We all know how much lenders take your credit history into account when they’re assessing your application. Should you just give up if you’re a self-employed person with a history of adverse credit?
The short answer is ‘no’. It may be trickier. You may need to look a bit harder. But if you know what you’re doing you can still find a mortgage deal that will suit you.
Why it’s tricky if you’re self-employed
One thing that lenders want to know is that you are financially able to repay your mortgage loan. The main way that they assess this is by looking at how much money you have coming in versus your expenditure.
For employees it’s relatively easy to show how much they earn. Payslips provide clear, externally verified proof of income. In addition, a permanent contract will also demonstrate to lenders that your income is reasonably secure.
If you’re self-employed you don’t have the ‘proof’ that payslips would give you. If you’re the majority shareholder in your limited company, then most lenders will class you as self-employed even though you do have payslips. You also don’t have as much security about the level of your future income, or even whether you will have any income in future.
Why a poor credit history could make it worse
As well as looking at how well you are equipped to pay back your mortgage, lenders will also take a look at how you’ve handled your finances in the past. The simplest way for them to do this is to look at your credit history.
The simple fact is, if your credit history is poor it makes getting a mortgage deal more difficult. It’s also true that, as a self-employed person, there may be factors, some of them not entirely within your control that could impact negatively on your credit history. Self-employed people tend to be natural entrepreneurs, and sometimes that comes hand-in-hand with taking financial risks that can on occasion backfire.
What can affect your credit history
Late paying customers
We’ve all been there. You do the job; you invoice the customer and then you wait. And wait. And wait. Late-paying customers are a real hassle for the self-employed. Your cashflow is affected and you may discover that you have expenses you can’t meet. The temptation then is delay paying a bill or even making a mortgage repayment. You don’t intend to miss it entirely, but a few days late isn’t going to make much difference right, if I miss one entirely it won’t matter? Wrong. Late or missed payments, particularly on mortgages will appear on your credit report, and make lenders question your financial stability.
Even with the best planning in the world, unforeseen expenses can arise. Whether it’s a broken piece of equipment or a surprise bill, the chances are there will be occasions when your business will be forced to pay out for a cost you weren’t expecting.
If this happens it’s always better to extend your existing credit, whether that’s an overdraft or a credit card, rather than applying for a short-term so called ‘pay day’ loan to plug the gap in your finances. Pay day loans are a particular red flag to lenders as they could indicate a lack of financial planning.
In the first quarter of 2019 just over 20% of the people who were declared bankrupt were self-employed. Given that the percentage of self-employed people in the UK is under 15% this suggests that the self-employed are statistically more likely to enter bankruptcy than people in other types of employment.
Whatever the reasons for this, and we can speculate that the self-employed may be more natural ‘risk-takers’, the impact on an individual’s credit history is significant.
This doesn’t mean however that you won’t be able to find a mortgage deal, as there are still lenders out there who will consider your application. A lot will depend on the detail of your bankruptcy, such as how long ago it was.
If you’ve had financial problems in the past but wanted to avoid bankruptcy you may have entered into an Individual Voluntary Agreement, or IVA. This allows you to enter into agreements with your creditors in order to pay off debts.
Again this will have an impact on your credit history but with the right advice you could still find a lender who is prepared to consider you for a mortgage.
Tips for finding a bad credit self-employed mortgage
1. Check your credit history
Understanding what your credit history looks like can help you anticipate any problems that may arise with lenders.
2. Don’t make it worse
We’ve already mentioned that lenders see products such as payday loans as a red flag. So, avoid applying for this, particularly if you’re about to try and find a mortgage.
3. Try and get a large deposit together
Easier said than done maybe, but with the impact of Coronavirus, lenders are more risk adverse and will be more sympathetic to your application if you can put down a bigger deposit.
4. Get your books in order
Keeping your personal or company accounts up-to-date shows lenders that you’re on top of your finances, no matter what problems you’ve had in the past. Having them signed off by an accountant gives them even more confidence.
5. Prove your income
Give yourself time to get hold of your tax return. If you file your self-assessment online, you can download them straight from the HMRC website. Give yourself more time if you file paper returns.
6. Speak to a broker
A specialist bad credit mortgage broker has years of experience securing great deals for self-employed people with poor credit histories. If they are a whole of market broker they will have access to lenders and mortgages that you will never see yourself, as they’re only available through intermediaries.
They will also have lots experience of similar situations, e.g. they’ll know which lenders will deal with only one or two years accounts, or which mortgages can be obtained taking retained company profit into consideration.
Letting a professional handle your application doesn’t just save you time and hassle, it could be the difference between finding a mortgage and not if you are self-employed with bad credit.