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Determining relevant self-employed income and lending criteria

Mortgage Strategy published a thought-provoking article last month. Its premise suggests that self-employed borrowers get a raw deal with mortgage lenders.

Harsh, you might say. But I agree with the content…to a point.

The majority of self-employed workers do still struggle to prove their mortgage affordability.

The problem is often that they try to get approved at their local or a High Street branch.

But a generic advisor doesn’t understand (or can’t use) income listed as a net profit.

If the system’s broke, get a broker to fix it

So, what’s the answer? Do you forfeit the ability to buy your own home if you work for yourself?Hell, no. There is a whole host of mortgages tailored towards independent professionals.

In that article, Daniel White sums up the self-employed mortgage conundrum in a nutshell. He argues that knowing that such products exist alone isn’t enough.

Instead, potential self-employed borrowers should realise that the priority is:

“not so much finding them. It’s the broker understanding [which] lenders specialise in these areas.”

that’s imperative. I couldn’t agree more.

Facts and figures that fuel misconception

But you need to dig deep to get a real understanding of why the self-employed find getting a mortgage so tough.

Mortgage Strategy’s source data came from a Direct Line for Business update. More industry thought leaders added to the discussion with their own thoughts.

Between them, they gushed a mind-numbing amount of facts, figures and quotes.

The article goes to great lengths to enlighten and educate us about:

  • the size of the UK’s self-employed workforce;
  • its gender split;
  • how perception of lenders’ permie bias deters a quarter of self-employed from applying.

In summary, the volume of people working for themselves is growing. But does that insight tell us anything about how the self-employed get mortgages?

No. But it does support the case for mainstream adoption. And to help get that off the ground, you’ve got to get to the organ grinder, not the monkey.

Fishing for evidence in a sea of red herrings

That this information shocks these business’ readerships is shocking in itself. It’s also kinda the point of this bolt-on article.

exasperated womanYou should never let facts and figures blind you. Especially if that data originates from anywhere other than a niche specialist.

You have to be careful.

Many publishers still look to confound their readerships with headline-grabbing stats rather than helpful advice.

It’s frustrating and is so not helpful.

If you know what to look for in an explosion of facts, you can find the truth. This holds true for Mortgage Strategy’s base article thrust, too.

Our successful history of getting self-employed mortgages backs up Daniel White’s comment. A broker is the best way to get a mortgage if you’re self-employed.

That said, we need go to the source of these figures to get a clearer understanding of why that’s so.

That source? The Government itself.

Scratching the surface of affordability bias

For us and our followers, everything thus reported is old news. But more people are questioning mortgage lenders about their treatment of independent workers.

As this succinct article on the same website demands:

“Isn’t it about time the [mortgage] market responded to the self-employment revolution?”

Yes. It is.

But are all the experts haranguing and chastising the wrong people?

When responsible guidelines don’t accept enough responsibility

It was the FCA that formulated Responsible Lending Guidelines after the credit crunch. And although only “guidelines”, lenders risk the FCA‘s wrath if they stray too far outside them.

So, how do those guidelines affect how lenders approach self-employed workers?

Moreover, how can we expect lenders to gauge self-employed income if government can’t?

I say that not as an idle swipe at the government. But we do have to understand where the ambiguity over self-employment originates.

In the ONS‘ recent Trends in self-employment in the UK article, the report surmises that:

“One reason for limited coverage of self-employed income is the difficulty…measuring it.
“…the nature of their work may make it difficult to report accurate incomes for a particular period.”

In a further article, the ONS sees no solution to measuring incomes anytime soon. It suggests that ‘real time information’ has a limited use, for PAYE employees only.

For self-employed income, the only way they know to ascertain figures:

“is by surveying the self-employed themselves [which] can be quite challenging.”

The underlying problem isn’t always with the lender

So you see, I can see from where all the angst originates. I can even sympathise. But my team and I deal with self-employed friendly mortgage lenders every day.

We’ve seen first hand the efforts they’re making with lending criteria to be more flexible. We’ve even shown them how self employed mortgages are calculated to optimise income.

Lenders jump through hoops to stay within guidelines and write accessible criteria. It’s not always easy, as all the barriers outlined above go in some way to prove.

But we work together with their specialist underwriters. Doing so allows us to focus on the areas we can to help define how the self employed qualify for mortgage.

And anything beside those elements we can affect? It’s often little more than white noise. Let us be your mute button to allow us all to focus only on criteria that matters.

Author: John Yerou

John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.

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