Many self employed feel it maybe harder to get a mortgage since the Covid hit. As before this and post lockdown many people hoping to get on the property ladder will first have to think about securing a mortgage. Getting a mortgage is still possible even with the current economic uncertainty.
Lending requirements will vary by bank or building society, but in general, you will need to provide evidence of your income to prove that you will be able to make the monthly repayments. For the self-employed, this can be more difficult.
In the past, the self-employed could simply self certify their earnings. Following the 2008 financial crash, the Financial Conduct Authority banned this type of mortgage. From 2011, self-cert mortgages were discontinued due to problems with individuals overstating their earnings. This led to lots of people borrowing more than they could afford to pay back.
To secure a mortgage as a self employed individual today, the process is a lot more complicated. In this article, we will look at some of the steps required to get on the property ladder while you are self-employed.
Getting a mortgage while self employed
While full time, salaried workers can show a lender their work contract, payslips and bank statements as proof of income, the process is a lot more complicated for the self-employed.
Many lenders will ask to see 3 years of accounts, but this often doesn’t include the current year. This is because they will only accept self-assessment tax returns as proof of income. Since tax returns are not due until January of the following year, this can make it more difficult to prove your income for the current year.
In addition to 3 years of accounts, lenders will also check your credit score to see your history of repaying debt. And finally, they will also want to see that you have saved a healthy deposit. If you are applying with a partner and only one of you is self-employed, this can make the process much easier.
Can I get a mortgage when I’m new to self-employment?
For those new to self-employment, applying for a mortgage in the first year can be nearly impossible. Since you will have no way to prove your income, lenders will be reluctant to make a lending decision. If you are in your first year of self-employment, it’s best to wait before making an application as a failed application can hurt your future chances.
Many lenders will calculate your earnings as an average of your past 3 years of accounts. If your income has increased year-on-year, this could mean you are able to borrow less than you can afford. Maintaining consistent and up-to-date accounts is vital when you are thinking about applying for a mortgage.
Mortgages with 1-year self employed accounts
After your first year of trading, you may be able to secure a mortgage. If you are looking for mortgages for self employed with 1 years accounts, you will have better success with a specialist lender.
Many applicants head straight to their high street bank as they assume that this will give them the best chances of success due to the established financial relationship. This isn’t the case as many high street lenders are behind the times with self-employed income.
Specialist lenders are more likely to be able to help you access a mortgage, but it isn’t always easy to find the right lender. A mortgage broker can help you to navigate the mortgage market and secure the best deal. Although you will have to pay the broker, this will often work out cheaper in the long run as you often save money on interest and fees.