Self Employed Mortgage – Is it an option?
It is widely accepted that the idea of a job for life has long gone. Redundancy is recognized as a fact of life in the modern workplace. People in full-time employment have variable incomes, depending on actual hours worked and targets achieved. However in general, lenders tend to view the employed as being a lower risk than the self-employed.
Reasons Why Lenders Are Wary Of the Self Employed Mortgage
Lenders are now wary of offering mortgages to the self-employed due to previous shifts in the economy. When the economy and housing market was moving fast, lenders took a relaxed view to ensuring that borrowers could repay their self employed mortgage. The rise of house prices meant that for a time it was reasonable to believe that if a borrower ran into financial difficulties they could solve their debt problems quickly and easily by selling their property.
With this in mind the self employed were often offered “self-certification loans”. These were loans requiring the borrower to make a simple statement confirming their income, rather than having to produce documentary evidence of the income declared. These loans have come under heavy criticism and have created serious problems for the banks. This has become one of the reasons why the current affordability criteria was introduced.
What Does Affordability Actually Mean?
Affordability means that a borrower must have the financial ability to meet all relevant expenses including their mortgage repayment. Potential borrowers can therefore expect to be asked many questions regarding their current financial situation and future plans.
They can also expect to be asked to provide documentation to support any points in favour of their application. Potential borrowers must now demonstrate good money management skills along with having a good grasp on the family finances if they are to obtain a self employed mortgage. They should also have a healthy deposit and a financial plan for the future. It can often be very helpful to discuss your plans with a qualified mortgage advisor in advance of any planned application to ensure that your finances are put in good shape before the application is submitted.
What Does This Mean For a Self Employed Mortgage?
In theory, the self employed are subject to the same lending criteria and products as the employed. However in practice lenders are aware that the nature of self employment can make life much more financially unstable. The self employed can be let go at any time, and possibly without notice or redundancy payment.
Also lenders are aware that it is much easier to run an apparently successful business in the short term rather than to run one consistently over several years, or even the lifetime of a mortgage. This means that for those who have recently begun working for themselves, the chances of securing a self employed mortgage can be poor. Those running their own business for two years or more stand a much better chance in the mortgage market. Their success will be dependent on the self employed mortgage applicant keeping accurate financial records which can be verified.