How to go about getting a self-employed mortgage, even if there’s a pandemic on
So freelancers, the big question -- are you ready to buy a property!?
If you are considering your first house purchase as a freelancer, there are certain things you need to know, and pitfalls to avoid, to improve your chances of getting a mortgage.
In this four-part article, we’ll collaborate with Tide to explore the general challenges of getting a mortgage as a freelancer, and then look at what the self-employed can do to prepare themselves for success in the home loan stakes -- in other words, getting on or up the property ladder!
In this first instalment specifically, we’ll also address what everyone is still talking about – the coronavirus pandemic, and how it’s affecting lenders and lending to freelancers. But first, let’s begin with the basics.
What is a self-employed mortgage?
‘Self-employed mortgage’ is a misnomer.
There is not a specific mortgage designed for the self-employed, although there are some lenders who are more receptive to applications from freelancers, sole traders and those who run their own business, and more willing to accept irregular incomes or a brief trading history. More on that later.
As a freelancer, you will apply for a regular mortgage like everyone else. So when you are searching for a mortgage, you can compare the entire market. You have the same access to mortgage products as everyone else.
The similarities stop when you get to the application process. As we’ll see, getting a mortgage when you’re self-employed is usually more complicated than if you had a regular salary.
Is it harder to get a mortgage when you’re self-employed?
In most cases, it probably is a little harder to get a mortgage if you’re self-employed.
But let’s explain what that really means, in practice.
Lenders are not necessarily biased against self-employed people just because they have an irrational fear of self-employment!
The reason why getting a mortgage is harder when you’re self-employed is two-fold:
- Self-employed income tends to be irregular
- Determining your income can be tricky for lenders (and their systems!)
While the rates of self-employment continue to skyrocket, the dominant working model for many generations has been salaried employment. Lenders understand salaries. They know that the income will be the same, every month unless the person gets a pay rise.
With a salary, determining your income is easy. A lender simply looks at your payslips, checks your bank statements, and can be confident that you have enough money each month to pay your mortgage.
Compare this to self-employment, where incomes can fluctuate wildly between months and seasons, and where trying to ascertain a baseline income may require an analysis of bank statements and accounting records, and you can see that the challenge is harder for lenders (though certainly not impossible).
A ‘safe bet’ you’re probably not, but fear not -- all bets for you are definitely not off!
So employees are generally seen as a ‘safer bet’ to lend to and repay that loan, because their income is simple and predictable.
But that doesn’t mean that lenders don’t want to give you a mortgage if you’re a self-employed, sole trading freelancer! Far from it.
Lenders love to lend. It’s how they make money. Their business depends on lending to people like you.
So keep in mind that, broadly-speaking, lenders want to lend to you. But first they need to be sure that you can afford to repay the mortgage.
As a self-employed applicant, you will need evidence to prove your income.
You will likely have to spend more time gathering evidence, producing documents and generally jumping through hoops than you would if you had a regular salary.
If you take the time to prepare your finances in the right way, and gather all the evidence that lenders need, you have a strong chance of being approved.
Before we get to the practical advice, let’s consider the issue of the day -- coronavirus.
How has coronavirus affected self-employed mortgage applications?
The base answer is that coronavirus has affected the lending process, but the precise nature of these changes is still in flux.
For a time, lenders were locking down their purses and making it harder to get a mortgage. But this caution appears to be easing (as of early-mid August 2020), and lenders seem a little more eager to approve applications.
In the heart of covid-19, some banks instituted pre-application questionnaires to check eligibility before accepting mortgage applications. Other lenders have been asking to see the past three months of your bank statements, as well as your historic accounts, to see how the pandemic has impacted your income. That said, the latter request for accounts is routine in the mortgage affordability space if you’re self-employed!
Fortunately and generally-speaking, lenders are learning to take a more individualised approach to lending, because they recognise that freelance incomes are irregular but often larger than salaried equivalents.
And reassuringly, a mortgage expert recently told Which? that many lenders are willing to accept applications from people who have used the government’s Self-Employed Income Support Scheme (SEISS) – another signal that lenders increasingly recognise that self-employed people are a significant part of their customer base. So all is definitely lost!
Coming up next…
In the next instalments of this mortgage series for freelancers, we’ll explore what makes you self-employed in the eyes of lenders, how to prepare your application, how to maximise your chances of getting approved and then, we’ll delve further into the practicalities – and the realities – of securing a home loan as a self-employed sole trader.