UK Mortgage Problems for the Self Employed
People who have purchased a property know that securing a loan is a difficult process. A lender requires a lot of information and the borrower need to pass many pre-requisites in order to qualify for a loan. After all, a home is one of the biggest investments most people will make.
People will start shopping for a mortgage before shopping for a house and the pre-approval process can be a daunting task. For the self employed getting a mortgage can be a harrowing experience and the process can even turn them away from home ownership.
But there are options, and even with the credit crisis putting pressure on the money markets, there is opportunity for the self-employed. According to a National Statistics study into the self-employed and their earnings, the UK had almost 7 million self-employed in 2003 with an average gross salary of about £20,000. The high population of self employed has given rise to a specialized field in mortgage markets.
Self-employed mortgages are unique mortgages that can be flexible to compliment a self-employed person’s flexible income. Often someone who is self-employed has little or no fixed income, and gets paid in lump sums when products or services are delivered. This can be problematic when dealing with standard mortgages. The payoff is that lenders will charge higher interest rates to customers with flexible loans.
These ’special loans’ are becoming rare in the face of tightening credit markets, as lenders tighten rules and increase mortgage costs. The credit crisis is hitting the entire mortgage market, but since self-employed mortgages are considered high risk the mortgage crisis is affecting the self employed more than most. But despite these tighter restrictions there are still different packages available, and it pays for a self-employed borrower to shop around for the best deals.
For the self-employed the biggest problem in acquiring a mortgage is the complexity of the assessment process.
One option is to use a broker that specializes in finding self-employed mortgages. While brokers have receive negative publicity of late with the sub-prime crisis in the US, they are still a useful asset for self-employed customer because the can take some of the hassle out of securing a flexible loan. Brokers specializing in this type of loan know what is required by the lenders while having insight into the difficulties that borrowers face when approaching a lender. People should try and find an independent broker that is also accredited by the Financial Services Authority.
The truth is that any well-managed business with a clear financial history is as likely to get a loan as someone on a salary, provided the borrower receives an income high enough to maintain the loan. In the UK a lender will require at least three years of accounts to prove the income of the self-employed. Lenders need three years to assess the stability of the income, and to ensure no irregular revenue inflates the results.
Income history can be a problem for people who try to reduce their declared income to lower tax. The higher the income the better change a loan will be approved.
Income is the main qualifier for a loan, however if a borrower is able to reduce the lender’s risk then it increases the chance an application will be successful. For example, if there is a problem with providing three years of accounts or there is some irregularity then a lender might ask for a larger deposit which will help to reduce their risk.
One of the best risk-reduction options is mortgage insurance. Some lenders will require this insurance for a self-employed mortgage applicant because the income is reliant on the borrower’s ability to work. For example, if you are a self-employed plumber and you have an accident, putting you out of work for six months, then your income has disappeared instantly.
Mortgage insurance ensures that the mortgage will be paid if something happens to your income. Many lenders prefer borrower to have mortgage insurance and many lenders require mortgages with low deposits to take out mortgage insurance.
Mortgage insurance can be organized by the lender; however it does increase costs of the loan. There is really no substitute for having a substantial deposit, particularly at this time when credit markets are getting squeezed.
It is important to remember throughout the process that lenders are not just making life difficult for a self-employed applicant. The lender is only ensuring that the applicant can meet their obligation and avoid defaulting on a loan. It is important for the self-employed to be honest and forthcoming in dealing with a lender, and accept advice that will help to secure a loan.
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