Securing mortgage finance on the High Street is far from straightforward for the self-employed. Few lenders assess self-employed income in the same way.
Each bank or building society has its own idea of risk. That risk invariably transfers to independent professionals when they set out to get a mortgage. Here, we look at some of the danger signs.
The one trait lenders share is adopting their own unique self-employed assessment criteria.
An oxymoron that thought process may be (as well as a real pain), but it’s nonetheless true.
One lender may insist on seeing three years’ accounts. Another may just ask for one year’s accounts. Yet another can ask to see your contract, bank statements and recent history.Few of them sing from the same hymn sheet. As a result, the question on the tip of many freelancers’ tongue is:
Which method of proving my income will get me the biggest/most competitive mortgage?
That’s what we hope to explain here. We want to show you the evidencing income scenario from different stakeholders’ perspectives.
A mortgage lender’s view: the freelancer/sole trader
In recent times, regulatory bodies have tasked lenders with one clear mandate: eliminate risk. That’s true no matter how you conduct your business. The security of their funds in your hands will drive the mortgage application process.
Thus, the best way a lender can gauge your future income is on your past earnings. For this, they need accounts and/or SA302s.
Proving your mortgage affordability
As a freelancer or sole trader, the chances are you have no long term contract. You work on ad hoc assignments via agencies or on the back of your own marketing/reputation.
Yes, you can demonstrate an established stream of income. But beyond the here and now, you have little long term security from your clients.
A lender’s view of trading this way dictates what they want to determine your relevant earnings.
Some lenders are sympathetic. They deem one year’s accounts sufficient to calculate your mortgage affordability. Others may tow a tighter line, insisting upon two or even three years’ records.
Either way, your accounts must prove you can afford the mortgage you’re asking for. For people who streamline their accounts, it’s striking that balance that’s key.
If you declare a low income, chances are you’ll struggle to find an adequate mortgage.
Alternatively, your accounts may demonstrate a continued stream of high earnings. If so, you must ensure that your net income isn’t too disparate from those figures.
A mortgage lender’s view: self-employed, no accounts
If you’ve only just begun trading, you won’t have the accounts a lender needs. You may believe (and can prove) that you can afford the repayments in theory. But limited accounts and trading history alone won’t satisfy their risk criteria.
That needn’t be the end of your home ownership aspirations, though. There is a scenario where you can secure mortgage funds with less than one year’s accounts. Before we move onto that, let’s talk about contracting first.
Contract-based underwriting – the contractor’s secret weapon
Over the course of the last ten years, select lenders have adopted ‘contract-based underwriting’. What’s that? It’s a way that contractors can buy a home using their contract rate, not accounts and payslips.
Depending upon the nature of your business, contracting may be an option. If you can secure a contract, some lenders view your circumstances in a different light.
But it’s not as straightforward as just deciding that contracting’s better for you. It’s a complete lifestyle choice and differs from freelancing in many ways.
A lot will depend upon the readiness of your client to commit. Failing that, you may need to talk to agencies to ask them to find an assignment matching your skills.
What types of contracts do lenders accept?
Contracts that lenders consider for mortgage affordability often last 3 months, or multiples thereof. But again, there’s no set rule for how a bank or building society assesses a contract. As, indeed, there’s no set way that you (or your accountant) can claim tax relief.
To complicate matters, the majority of ‘contractor-friendly’ lenders prefer to deal through specialist brokers.
That’s down to the nature in which contractors operate. As we said, it’s never straightforward; each business is as unique as the next.
Contractors can operate via different payment structures. Some incorporate and trade through a Limited Company, or PSC. Others go through an Umbrella company.
A specialist broker will have knowledge of all payment structures. Thus, they can package your application so that an underwriter has clear sight of your affordability.
How would you view your business? It’s important
Getting the lender to see your business as a viable one is key. Imagine this scenario (based on a true story).
One lender can assess a one-man limited company or director using their salary and dividend drawings. The next could use their retained profits to work out their affordability instead.
But how do you know which is best for you? How can you tell which lender uses what base as their criteria?
The simple answer is: you can’t. Not unless you know how their underwriters work.
That’s why choosing a specialist broker is key. Some lenders prefer the accounts route, which in itself has two scenarios:
- Lender A uses salary and dividend drawings to work out your mortgage affordability;
- Lender B’s guidelines use salary and retained profits as their base for the calculation.
It doesn’t stop there. Yet other in-branch advisors ignore those two methods and use your day rate.
A specialist self-employed mortgage broker will first point you in the right direction. Often after talking to you and gauging the way you work and record your activity.
Then they’ll package your application in the way the best lender for your circumstances can use.
If your accounts don’t stack up, they’ll tell you immediately. This is not to make a point; it’s to save you the heartache of rejection.
Straight talking in this manner may also help protect your credit rating. There’s nothing like a recent failed application to deter the next lender you visit.
Mortgages for all independents remain a speciality field
Mortgages for all self-employed people remain a speciality. Yes, some lenders have adapted their lending criteria to accommodate independents. Others try to fit freelancers to the PAYE model, beyond which most High Street lenders can’t see.
So your next step is to hook up with a specialist broker who understands you and your business. They’ll match those with the right lender, often meaning them approaching an underwriter direct.
As we said at the start, it’s risk that underwrites the self-employed mortgage process. Now it’s over to you to do your bit.
Reduce the risk of a lender seeing your business in a dim light by engaging a specialist broker. Their perspective will affect how much you can borrow to buy your home; make sure it’s clear!
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.