On the surface, it may seem like the employed and the self-employed deal with two completely different mortgage markets. Actually, the same rules apply to both mortgage markets. They also manifest themselves in much the same way. If you understand this, it becomes much easier to navigate the mortgage market when you’re self-employed.
The basics of the mortgage market
Ultimately, getting a mortgage boils down to your ability to show a lender that you are both able and willing to pay it back. Lenders assess this by looking at your past and present to see what they can infer about your future.
Your past is represented by your credit score. Your present is represented by your deposit, bank statements and proof of income. Your future is inferred from the information you give about your past and present.
Another key reality of the mortgage market is that lenders are all individuals. There are some basic rules they all need to follow. There is, however, often a lot of scope for them to exercise their own judgement. This means that your chance of getting a mortgage can depend, at least in part, on where you make your application.
What this means in practice
What this means in practice is that success in the mortgage market is less about employment status and more about effective preparation. If you’re self-employed, you should be preparing at least three years in advance. The employed may be able to cut this down to a year. Even for the employed, however, longer is better. Here are the main points you need to address.
Your credit score
There are numerous online articles about the importance of your credit score and how to take care of it. Read them and follow their tips.
If you know you have bad credit, then make an active effort to repair it. You may find this process easier if you can get professional help. If you can’t, however, again, there’s plenty of information available online.
If you really can’t repair pre-existing issues, then remember that, eventually, time will deal with them for you. It can take multiple years for certain markers to be removed completely.
You can, however, work to make these markers less relevant by showing that you are managing your finances well now. Be aware that this strategy is unlikely to yield overnight results. That’s why it’s important to start any repair work as soon as possible.
Your deposit
There’s probably nothing more that can be said about the importance of having a substantial deposit. Again, these take time to build so give yourself as long as you can to do so.
Your bank statements
Lenders will typically ask for copies of bank statements as part of your mortgage application. You should be prepared to hand over at least 6 months’ worth of statements. It would be advisable to think about how these would look to a lender. For example, even if you can afford the occasional flutter, you might not want to advertise that fact on your bank statements.
Your proof of income
There are two factors to consider here. One is explicit and the other is implicit. The explicit factor is the amount of income you can demonstrate you have earned up to the point of your application. The implicit factor is what the lender thinks of your prospects of continuing to earn at least the necessary level of income to be able to afford your mortgage repayments.
This is where the situation can get challenging for the self-employed. They need to be able to show that their business model is viable over the long term. For this to happen, the lender has to be willing to listen, objectively, to their explanation. This is why applying for the right product with the right lender can be so important.
Applying for the right mortgage product with the right lender
Do your own research thoroughly and/or use a mortgage broker. Make sure you only apply for mortgages where you have at least a decent chance of being accepted.
For mortgage advice, please get in touch
Your home may be repossessed if you do not keep up repayments on your mortgage.
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