Banks consider a wide range of factors before approving mortgage applications. The fundamental consideration is your credit history—through which they check whether you’ve taken loans before, if you’ve filed for bankruptcy and if you’ve defaulted on credit before.
Whether you’re self-employed or work a 9–5, your lender will only concern themselves with your credit history before approving or rejecting your application. You, as a self-employed borrower, have access to the same mortgage packages as a salaried employee—you’ll just have to go through extra financial checks.
Why is it Difficult to Borrow Now?
Ever since the financial authorities in the UK banned self-certification mortgages, it’s become a little harder for all self-employed people to get lines of credit. Back in the day, when self-certification mortgages were allowed, self-employed people didn’t have to offer proof of income or documentation guaranteeing the truth of the information they provide.
In 2010, the FSA placed a blanket ban on these mortgages citing higher risk and a need for greater due diligence that would minimise the risk of fraud or bad debts for any lenders. It’s a really commonsensical move that minimises the liabilities on lending institutions—because what if too many people defaulted on their loans at the same time? The banks would all default! It was easier for people to get loans back then—now self-employed people have to go jump through more hoops to get credit.
Why do Self-Employed People Face Greater Accountability?
When you’re working for an organisation, you have a salaried account with steady income streams and multiple records of your financial information—with your employer and the bank. It’s easy enough for any lender to look up your financial history and it’s easier to assess your risk of defaulting, which puts your lender at ease.
When you’re self-employed, on the other hand, there’s no way of telling what your income streams look like—you’re a wild card whose financial conditions are difficult to assess. Some days you might rake in more income than on others and since you have complete control over your financial records, the lender errs on the side of caution to treat you a little warily. This has become a big problem in the UK because lenders are not willing to trust the self-employed in Britain.
How to Get a Mortgage if you’re Self-Employed
Generally, banks throughout the UK consider you self-employed if you own a 20% share in any organisation. Partnerships are treated the same way as sole proprietorship are and both sol-owners/partners will have to go through the same financial scrutiny. You’ll need to submit the following documents with your application:
- Photo identification.
- Proof of address, for the place you’ve lived in for the past three months—this includes utility bills and bank statements.
- If you’re remortgaging, you’ll have to present the building’s insurance policy.
- Details for the account you intend to make payments through.
- Complete credit history including outstanding loans, credit card bills, car finance details, overdrafts, etc.
- Details of life and health insurance policies.
- Information on any other mortgages you might have taken on.
- Details of the property your want to buy.
- Your solicitor’s information.
- Proof of income, which includes:
- HMRC tax year overviews which show that you’ve paid all of your tax liabilities for the period.
- Tax calculations for the past two years
- If you own an LLC. You’ll need to disclose the accounts for the past two years—verified by a qualified accountant.
These are documents that have to be submitted for all types of mortgage packages—your lender will inform you of any additional documents you need, depending on the product you’re applying for. Assuming that all of your documents and financial information meet the lender’s requirements (whatever these might be) your application will be approved.
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