Looking to get on the property ladder? You might think twice about it given the commonly held misconception that it is almost next to impossible to get a mortgage when you are self-employed. Well, according to experts this is all hogwash and you shouldn’t believe any word of it. As a matter of fact you have as much chance of getting your application approved from mortgage lenders as that if you were employed. It is just that you have to show a little bit of judgment and prudence in your approach to managing your finances.
In the following paragraphs we shall discuss in some detail, the steps you need to take and the mistakes you need to avoid as a contractor, freelancer or micro-business owner to give yourself a realistic chance of getting your mortgage application approved from mortgage lenders.
There’s no such thing as a self-employed mortgage!
Well, to tell you the truth this is all bollocks. In the United Kingdom, you are eligible for a variety of mortgage products irrespective of whether you are employed or self-employed. Lenders are not bothered about your employment status; they are more interested in your ability to pay. If you are employed, that means you are likely to get a fixed amount of salary at pre-determined intervals. It certainly boosts the confidence of the lenders as they are assured of their payments. This, however, does not diminish the chance of self-employed as there are plenty of ways through which self-employed can prove their repayment abilities.
The seeds of confusion surrounding the concept of “self-employed mortgages” were sowed with the abolition of self-certification mortgage back in 2014.
What were Self-Certification Mortgages?
Self-certification mortgages, or self-cert mortgages, enabled people to borrow money to buy a home without them requiring to disclose their income. The applicants disclosed their income to the lenders without the need for furnishing any concrete proof to back it up. Originally set up to help a minority of self-employed borrowers who generally found it difficult to prove their income and thus get a loan, this was quickly misused by unscrupulous borrowers who inflated their income to secure a higher loan amount.
The phenomenon became so widespread that self-cert mortgages quickly earned the nickname “liar loans”. Ultimately, the Financial Conduct Authority (FCA) had to step in and the body outlawed self-certification mortgages in 2014. This made things a bit difficult for self-employed but by no means it made it impossible for them to secure a mortgage.
Also Read: Contractor Mortgages Guide
Getting a Mortgage: Employed vs. Self-Employed
The law requires the mortgage lenders to be sure of the borrower’s paying capacity before extending a loan. The onus as such is on the borrower who has to prove that they can keep up with the repayments. Therefore, it becomes slightly easy for employed people tom convince the mortgage lender of their paying capacity.
Employees generally get a fixed amount as salary in a time bound manner from their employers. As such, they can through PAYE produce payslips and P60s to prove their income relatively easily. Mortgage lenders with enough evidence of a person’s earnings can quickly and conveniently calculate how much time the borrower will take to make complete repayment.
The PAYE system is automated. At the end of the month, they get their salary after the pre-determined tax is deducted from their overall salary. This makes it extremely convenient for mortgage lenders to figure out how much loan they can extend to the self-employed and how long will it take for the salaried person top pay back the loan in full along with the interest.
If you’re self-employed, things can get a more complicated. With taxes, dividends, invoices, bills and other sundry expenses to take care of, it becomes somewhat difficult to calculate your exact profit. This in turn makes it more difficult for the self-employed to prove that the net profit they are earning will be enough to cover mortgage repayments.
So what’s the way out of this dilemma? The answer is pretty simple
Proper organisation of your finances is the key. If you are planning to buy a house in near future, it is best if you start setting your house in order right from now. Better organization of your accounts is a good way to eliminate any doubts that may creep up in a lender’s mind about your ability to make full repayments in a timely manner.
This brings us to the all-important question:
How to Keep Your Finances Organized?
As soon as you decide that you want to apply for a mortgage you should start getting your accounts in order. Few important things that you need to pay attention to that will help you along the way
Hire a Good Accountant
This is the most important step as only a qualified accountant can help you get your finances in order. Not only that, majority of mortgage lenders will not touch you with a barge pole in absence of financial information prepared by a qualified accountant. If you hire a good accountant, both you and the lender will feel confident about the accuracy of the information and the health of your finances. However, that’s not the end of it!
It is Important for You to Understand Your Figures
Being overly reliant on an accountant can backfire at times. You have to keep yourself engaged with the entire process as your inability to explain your own finances may put off some mortgage lenders. For example, at some point your cash flow may have moved southwards. The lender may demand an explanation for the same and any fumble during such time may shake a lender’s confidence about your ability to understand your own business and pay off the loan. On the other hand, they are most likely to feel more confident in your ability to efficiently manage your own business if you explain them the reason for the dip in your cash flow or any other such event.
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