Self-employment is growing in popularity, but many industries are struggling to keep up. Banking and mortgage providers are two industries that are slow on the uptake. If you’ve ever tried to apply for a loan or even secure a mortgage as a self-employed worker, you’ll know what a headache it can be.
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The main reason that mortgage providers don’t look kindly on the self-employed is that it can be difficult to verify income. In the past, self-employed workers had access to something known as a self-certified mortgage. This allowed them to state their own earnings and secure a mortgage without providing proof of income. Due to abuse of this system, this type of mortgage was banned following the 2007 financial crash.
Today, lenders are far more wary about lending to self-employed individuals. But if you’re self-employed and hoping to get on the property ladder, don’t despair. There are some lenders who specialise in mortgages for the self employed. If you’re interested in getting on the property ladder, you’ll need to follow these steps.
File your tax return
Mortgage providers will need something known as your SA302 calculation. This will outline your tax liability for the year and many lenders will use this as proof of income. If you’ve been self employed for less than a year, or if you have yet to file your first tax return, then working with an accountant can help you to verify your income. In some cases, lenders will want to see 2-3 years of tax returns, but some will accept applications from those with just 1 year or accounts or even as little as 9 months.
Be honest with your income
It’s not uncommon for self-employed people to make perfectly legal adjustments to their tax return in order to lessen their tax bill. However, this can lead to problems if you are applying for a mortgage. You might only be able to borrow 3 times your annual earnings, so if you’ve been adjusting your total income, this could lead to a much smaller mortgage amount. Instead, make sure you keep everything accurate for the sake of your mortgage application.
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Clean up your credit score
One way to demonstrate that your variable income doesn’t impact your finances is to clean up your credit score. First, make sure that everything on your file is correct and up-to-date. Next, you should make sure you never miss a payment, as this can stay on your credit report for up to a year. If you’re struggling with adverse credit, remember that there are some lenders who will still work with you. You just have to be prepared to be offered less than ideal rates.
Save for a deposit
Being self-employed means that you’ll have far greater control over your income. In many ways, this can make saving for a deposit far easier. You should also take advantage of the Help to Buy schemes available that will help you boost your deposit. The Help to Buy ISA can help you turn a £12,000 deposit into a £15,000 deposit. If you are saving with your partner and you both make use of the ISA, this could lead to a sizable £30,000 deposit. The more deposit you can provide, the more likely you are to be accepted, so make this a priority!
Most people head straight to their own bank assuming they’ll get a great deal. Loyalty means very little to mortgage providers, so don’t be afraid to shop around. Speaking to a specialist mortgage broker or advisor will give you access to a wide range of lenders, many of which will be more than willing to work with self-employed individuals.
Get income protection insurance
Although not a legal requirement, income protection insurance can help you if you get into trouble after you have secured a mortgage. Income protection insurance for freelancers will cover a portion of your income in the event you are sick or injured. This will ensure you can keep on top of your financial obligations and prevent you from going into debt. This can be a huge relief after you have secured a mortgage, and may even make lenders look more favourably on your application.