There’s no reason why being self-employed should hold you back from buying your first home, moving home, or even raising capital from your existing home. The only difference between being employed and self-employed is how you prove your income.
There is no reason why a lender should see you as a high risk. Indeed, one could argue that as a self-employed person you’re a lower risk to a lender as you have the ability to create an income rather than expect someone else to do it for you.
When looking to secure a mortgage, the first thing is proving your income. If you’re a contractor, you can have as little as two months left on your contract and still be eligible for a mortgage.
The most flexible lenders will take the value of your contract - even a short term contract - and annualise it before they then apply the income multiples. Generally speaking, the majority of lenders will agree 4.5 times your income, some go higher.
One thing that should please contractors is that, contrary to popular belief, you won’t need to provide your accounts. All you’ll need to supply is your contract. This is particularly helpful to contractors who have only recently moved from being a full-time employee and therefore do not yet have a whole year of trading accounts.
Getting your accounts in order
For the self-employed, sole traders, and directors of limited companies, lenders will want to see your accounts. You may need to ask your accountant to send the lender a copy of your accounts, so it pays to make sure you’ve got an accountant who is ready and willing to do this.
If you have an accountant who is on the ball, they should be able to do this very quickly for you. Some accountants will charge a fee for this service and some may take a while to respond, so it pays to get in touch with them before you start applying for a mortgage.
A common misconception regarding accounts is that you must have a minimum of 2 to 3 years of accounts. Certainly, if you have more than 3 years of accounts that demonstrate a positive financial trend, it would open up the market for you, meaning you’ll have a greater range of mortgage products to choose from at the most competitive rates.
However, it is equally possible to obtain a mortgage on just 1 or 2 years of accounts.
Making the most of your work history
Your work history can also be a huge help. If you’re new to being a contractor or have just become self-employed, you should keep your work history/CV up to date. A lender will want to know your income, however equally as important to a lender is to understand your ability to create an income.
If you have worked in a certain area - for example, IT - for many years as an employee and now have a contract in place in the same sector, your work history will be vital. Your CV would show the lender that you have experience in this field and are capable of maintaining and growing your contracts.
Don’t ignore the credit history
Your credit history is, of course, vital. If you pay your bills on time, have previously had credit and never defaulted on it, and your bank account shows regular payments rather than ad-hoc ones, it will help to show you a good credit risk to lenders.
However, if you’ve experienced credit problems in the past you need to be open and honest about it. Lenders understand that over a number of years we can experience the ups and downs of life; most people do.
By being transparent about this and explaining the whys and wherefores, the lender will feel that they are dealing with a decent, honourable, and trustworthy person.
If you try to hide your past, the likelihood is it will come about just before completion of your mortgage and the lender will likely withdraw. By being honest and opting not to hide things, you’ll avoid any nasty surprises later down the line.
Finally, make sure you speak to an independent mortgage adviser at the very start. A good, independent adviser will be able to tell you within just a few minutes if and when you can borrow, as well as how much, over how long, and, crucially, at what cost.
Having this information at the start of your journey is extremely valuable. Lenders want to support the self-employed, contractors, and directors of limited customers. The key to securing the mortgage you need is getting solid, independent advice and making sure you’ve done all the groundwork before you apply.
Rob Starr is CEO of Crunch Mortgages, specialists in home loans for self-employed people.