Mortgage lenders generally look favorably upon borrowers who are on full time employment as these incomes can easily be verified. But mortgages for self-employed require more paperwork and documentation.
There are ways for them to increase their chances of approval, and this article will explore these strategies.
Qualifying for mortgages for self-employed individuals is a far more complex process today than it was a decade ago. With the growing need for detailed records proving your financial health and increased income requirements, you now find yourself at an obvious disadvantage with your bank if you work for yourself.
If you are self employed and looking for a mortgage, only the specialised institutions are willing to compete for your business these days, so you may be better off starting the application process at one of the smaller banks or building societies on your local doorstep. If you do so you will have peace of mind knowing that your personal circumstances are taken into account in your application form rather than being tossed in the wind by a large Mortgage company or bank.
Mortgages for self employed – main requirements
It is important to remember that when applying for mortgages for self-employed individuals, the only thing that will decide your eligibility is your ability to repay the loan. Your bank will take into account the amount of your income as well as any assets you may have. They will also consider your level of expenditure, including food, clothing and commuting costs.
The number of properties you own and whether you use your house as a place of work may also influence your eligibility. If your dependents contribute to your family’s income then the figure they contribute to will also influence the amount of loan you can get and the interest you pay each month on your loan.
You may also need to provide evidence of earnings from your previous employer. This can easily be done by producing your last two payslips, or even your relevant bank statements. It is also worth remembering that most lenders are not willing to provide mortgages for self-employed individuals who have no fixed income or steady job. Even if your self-employment is the only source of income, you may still qualify for the mortgages for self-employed scheme so long as you have another steady source of income such as rental income or a part-time job that pays regular income.
Credit score and mortgages for self employed
The majority of people will have some degree of bad credit but the majority of lenders will be willing to lend to people on good credit scores provided they can assure them that they will be able to repay the loan. People who have low credit scores can apply for mortgages for self employed with higher interest rates. This is because the applicant is seen as a higher risk than those with good credit scores. In order get a mortgage at a good rate of interest, a good credit score is essential.
Financial stability
Being self-employed can be immensely satisfying, yet can make qualifying for a mortgage challenging. While lenders apply the same standards to everyone who applies for loans, lenders may place greater scrutiny on borrowers not subject to PAYE income and take extra precaution when reviewing business owners who do not have regular employment as part of their income stream. They want to ensure the business remains financially sustainable as well as they ensure there is enough income coming in each month for payments on debt obligations.
Lenders will also consider whether income has increased or decreased year-on-year; any decline can raise concerns that the borrower won’t be able to continue making payments on his or her loan.
Conventional and Mortgage loans typically require two years of net income history for approval; however, bank statement loans and one-year tax return mortgages may provide options to borrowers who do not fulfill this criterion. It’s best to speak to a lender as early as possible regarding what options exist to you if you’re self employed and looking for a mortgage.
Tax Returns
Conventional mortgages require extensive documentation of income for all borrowers, but it is especially essential for self-employed borrowers. Lenders need to see proof that your business can remain sustainable over the long run if the industry has experienced fluctuations.
One of the major challenges faced by self-employed borrowers is distinguishing taxable from non-taxable income. Depreciation expenses and other expenses can lower taxable income, which then lowers qualifying income for loans – this is why lenders require at least two years of tax returns from self employed borrowers before considering them as potential borrowers.
But there are lenders who are willing to consider mortgages for self-employed individuals who do not possess sufficient tax records to satisfy conventional lending standards, typically at higher interest rates due to taking on greater risk from lenders. A self employed mortgage advisor can help you select an ideal lender.
