The freedom of choosing where and when you work appeals to many and with advancements in technology including Skype and cloud sharing services, it’s no wonder that freelancing is on the rise.
Despite this, a survey by Gov.co.uk found that 73% of freelancers consider going back into full time employment because of concerns about being rejected by mortgage lenders.
In fact, working with a broker who specifically finds mortgages for self employed applicants can save you money, time and unnecessary mortgage rejections.
But it's important to remember that buying a home does't have to be stressful: https://www.sofi.com/home-loans/mortgage - you can make your dream home a reality!
Read on for some frequently asked questions about getting a mortgage as a freelancer...
- Why is it harder for freelancers to get a mortgage?
- Are there more lenders who offer freelancer mortgages now?
- What evidence of income do I need?
- What other documents will I need to apply for a mortgage as a freelancer?
- Are self employed people assessed differently?
- How can I improve my chances of approval?
- Do I need a perfect credit score to get a mortgage?
Why is it harder for freelancers to get a mortgage?
When a bank or lender considers loaning money for a mortgage, they want to feel confident that the borrower can pay it back.
For freelancers, this can case issues as income can notoriously fluctuate from month to month.
From a lenders point of view, this is risky. If the borrower’s income is down one month, how will they pay their mortgage?
Are there more lenders who offer freelancer mortgages now?
The change of employment patterns over the years has increased the demand for mortgages for self employed people.
This has led to many lenders modernising their policies which is great news for freelancers who benefit from a wider range of mortgage options and interest rates.
With 67% of those surveyed by Peopleperhour, saying that they freelanced for the freedom, this new wave of flexible lending suits many freelancers.
What evidence of income do I need?
Self-employed people are often required to provide a lot more evidence of their income than borrowers in full time employment.
This can include:
- Three years of certified accounts
- SA302 forms or a tax year overview (from HMRC) for the past two or three years
- Evidence of upcoming contracts (if you’re a contractor)
- Evidence of dividend payments or retained profits (if you’re a company director)
Why do I need three years of accounts?
A key focus for most lenders will be how much you earn and how likely you are to continue to earn that amount of income.
Therefore, the more years of accounts you have, the more proof of your level of income.
Most lenders typically like to see three years of your accounts.
Can I get a freelance mortgage if I have less than three years accounts?
Potentially yes - if you’ve been trading for less than three years, there may still be lenders who will consider you.
There are even lenders who under the right circumstances will accept applicants with one year of accounts.
What other documents will I need to apply for a mortgage as a freelancer?
- Passport
- Driving licence
- Council tax bill
- Utility bills dated within three months
- Six months worth of bank statements
The need for a copy of your bills can seem odd to some but lenders want to see them so that they can determine whether the cost of your outgoings will impact your ability to pay your mortgage.
Are self employed people assessed differently?
Whether you’re self employed or in full time employment, lenders want to know how much you earn and how sustainable your income is.
There are many variations of how a self employed person can define their employment status and this can affect the way a lender calculates their average income.
Sole trader
Most lenders will look at the accounts of a sole trader and focus on how much the income goes up or down.
If it remains steady or increases over time, lenders will usually take the average income from the past two or three years.
However, if it fluctuates often or has decreased dramatically in some months, lenders are likely to use the latest and lowest figure.
Contractor
A lot of contractors earn a day rate so lenders calculate their income by their day rate, the number of days worked each week, the amount of working weeks in a year and the lender’s income multiple (which is usually 4.5 but can vary depending on the lender.)
As well as this, lenders may also ask for at least a year’s contract history.
Partner
There are two ways that a Limited Company directors’ income can be assessed.
The first is to calculate their income based on their salary and any money paid by the business to shareholders.
The second is to look at the director’s salary as well as any company profit.
How can I improve my chances of approval?
Some lenders will categorically refuse to offer mortgages to freelancers but don’t let that put you off applying elsewhere.
There are plenty of ways to prove to other mortgage lenders that you are a reliable borrower, even if you’ve been knocked back from a lender in the past.
Get your accounts in order
A lot of freelancers manage their own books to save money, which can be useful in the early days of self employment.
However, it is vital that when you apply for a mortgage, your accounts are presented professionally and have been prepared by a chartered or certified accountant or as tax returns (sent to HMRC.)
Find a broker who specialises in mortgages for freelancers
A good mortgage broker will know which lenders are willing to lend to you and under what circumstances. This can save a lot of wasted money in application fees as well as time.
When deciding which broker to choose, check their experience and reviews. Have they negotiated mortgages like yours before? Were other borrowers happy with their service?
Good advice can be the difference between getting approved for a mortgage as a freelancer or not.
Consider smaller lenders
Some high street banks and lenders have strict criteria when it comes to mortgages, which can make it difficult to get approval for a loan if you’re self employed.
Smaller lenders can offer more flexibility and therefore be more likely to approve a mortgage in instances that a larger lender may not consider.
A disadvantage of some smaller lenders is that their interest rates can be higher, so be sure to shop around to compare the rates of other lenders too.
Do I need a perfect credit score to get a mortgage?
Not necessarily, although as a freelancer, a good credit score can improve your appeal to the majority of lenders.
‘Bad credit’ on your record suggests to lenders that you have mismanaged money in the past. This can raise red flags and therefore limit your choice of lenders and interest rates.
However, there are lenders who are more flexible and can take other factors into consideration when querying your bad credit.
For example, some lenders will look at whether any debts on your credit file are settled.
Other lenders look at the date of the ‘bad credit’ and if it isn’t recent or severe, they may consider loaning.
Improve your credit history
To improve your credit score and make you a more appealing borrower, there are some simple things you can do:
- Check your report to understand your credit score (You can sign up for free with Check My File, Equifax or Experian)
- Join the electoral
- Clear outstanding debts
- Avoid payday loans
- Avoid applying for credit and loans within short spaces of time
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