The mortgage requirements for self employed people have been tightened by the industry regulator. If you want approval, you’ll need to verify your income.
It was only a few years ago that getting a mortgage for the self employed in the UK was really easy. If you could find a decent broker, approval was virtually guaranteed. However, after tens of thousands of defaults and property repossessions, the Financial Services Authority (FSA) had no alternative but to step in and tighten the rules. You can no longer self-certify your mortgage, so your application will now undergo considerably more scrutiny than was once the case.
A consultation paper produced by the FSA revealed that almost 50% of all new loans between 2007 and the first quarter of 2019 were approved without any income verification. This meant that the applicant ticked a box or signed a declaration to confirm that they could afford the repayments. When you desperately want to buy a house or borrow more money, you rarely consider the fact that non-payment could lead to the repossession of your home.
In an article for The Daily Telegraph on the 14 March 2012, Jamie Dunkley stated that: "Self-certification mortgages have sometimes been dubbed "liar loans" because applicants declare their own earnings." Homeowners borrowed money to buy a new house or got a higher remortgage so they could perform home improvements, buy a new car or go on holiday. This isn't an issue, but it could become a problem if you aren't in a position to repay the money you've borrowed.
According to a report by the Council of Mortgage Lenders (CML), there were 9,600 repossessions in the first quarter of 2012. This is an almost identical figure to the last quarter of 2011, but about 30% lower than the high reached in 2009. What this figure doesn't reveal is the number of homeowners who've sought help under the Government Mortgage Rescue Scheme or have sold their home to a property cash buyer under a sell-and-rent-back scheme.
The end of self-certification has meant that you have to jump through more hoops to get approval. You can still get a mortgage when self employed, but you're going to need several years of properly-managed business accounts. You won't qualify if you've just started a new company in the last year. You're going to need to prove that you earn enough money to meet your outgoings. The more consistent your figures, the higher the likelihood of a successful outcome.
If you can verify your earnings, your chances of getting approval are exactly the same as a person in a PAYE job. You may not have a wage slip, but you can prove your income by showing the bank your last 2 years' company accounts. You'll find the some lenders require a minimum of 3 years' accounts, and each year must be signed off by an accountant. There may also be checks to ascertain whether your business is likely to be profitable in the future.
Mortgage Approval for Self-Employed and Freelance Borrowers
Mortgage Financing for the Self-Employed
Self Certification Mortgages: How do Self Certified Loans Work?
Although a mortgage broker can no longer fudge the figures, he can find you the best mortgage for the self employed. A broker is able to find out more about your situation and trawl the entire market for a deal that's best-suited to your requirements. For example, you may need to find a specialist lender because you have a bad credit rating. Although you'll have to pay up to 1% of the loan's value to use a professional, it could be the difference between acceptance and rejection.
If you're unable to comply with the mortgage requirements for self employed people, you won't be able to get a remortgage at this time. If your current deal has ended, you'll be switched to Standard Variable Rate (SVR). Given that the Bank of England has set base rates at just 0.5%, this isn't currently an issue. You'll just need to bide your time until you're able to provide 2 years' business accounts and can demonstrate that you can afford the repayments.
"Mortgage Market Review – responsible lending." The Financial Services Authority."CML reports repossessions stable, arrears falling." Council of Mortgage Lenders.Dunkley, Jamie (14 March, 2012) "FSA chief Lord Turner says new mortgage rules will help avert 'sub-prime' disaster". .