In our latest article Greg Cunnington, our Director of Lender Relationships and New Homes, looks at how lenders are assessing mortgage applications currently from self-employed clients and how we can help you.
There has always been a misconception that obtaining a mortgage if you are self-employed is an uphill struggle.
Indeed, there are concerns lenders may look unfavourably upon these applications because of the irregular or complex nature of the income.
Yet, the UK labour market has seen rapid growth of self-employment in recent years.
The number of self-employed workers increased from 3.3 million people (12.0% of the labour force) in 2001 to almost five million (15.1% of the labour force) at the end of last year.
We discussed in a previous article on the topic, link below, that the fears of self-employed around obtaining a mortgage are often unfounded and we help clients with these kinds of income regularly.
However, during the Covid-19 pandemic you may have read articles and headlines around how mortgage lenders have implemented tougher criteria for self-employed clients. Here we look to explain what has changed, and how we can help.
What has changed with mortgage applications for self-employed clients?
To start with the good news, all mortgage lenders are still lending to self-employed clients.
However, lenders have a duty of care to ensure that the mortgages they offer are affordable for the client’s circumstances.
For employed clients, this is fairly straight forward as lenders can assess your most recent payslips and bank statements to verify your income. If you are on furlough, you will still receive payslips and some lenders will now ask for an employer’s reference to confirm a return to work date.
For self-employed individuals, often your latest year’s accounts may be from 2019. Previously, lenders would accept these latest accounts as your proof of income to base the mortgage borrowing on.
This, however, would not be sensible to rely on solely, in this Covid-19 economic climate. Many self-employed clients have been adversely affected by the lock down and have had periods of no earnings, for example hairdressers and actors, or their businesses may now be operating but at a reduced income level (such as restaurant owners). This means mortgage lenders need to look at these applications in more detail.
Lenders are now sending applications for self-employed clients to specialist underwriting departments (the decision makers) who will assess the proof of income documents, such as your accounts or HMRC tax year calculation documents.
And they typically will now also want to view the most recent 3 months business bank statements, to check the income and activity. What's more, they will also sense check the industry and line of work you are in to assess the lending requested is sensible.
What does this mean for my application?
There are two main consequences for your mortgage application as a self-employed individual. The first, and most significant, is that the decision from the lender to approve your mortgage application is open to more scrutiny due to this manual assessment.
This means that how your application is presented is absolutely key. It is vital that all of your documentation is presented upfront (this is very important to lenders), and also that any additional information to support your application is supplied, as this has become increasingly important.
A great example of this is a mortgage application we transacted recently, where we helped two clients who worked as theatre designers. Please click on this link for full details. In short we got the case agreed thanks to the additional information on future earnings and personal reference letters we supplied the lender with, on the clients behalf. As you can imagine, the clients were delighted with the outcome.
Secondly, these more detailed manual assessments mean that we are seeing longer application timeframes for self-employed individuals.
Current timeframes of up to 13 working days for an initial assessment are common with some of the larger lenders, compared to less than 5 working days prior to lockdown. For self-employed applications these delays are almost unavoidable, as you will always require a manual assessment.
We covered this topic in more detail in our recent article on lenders timeframes, which you can access via this link.
Because of this it is now more important than ever to keep up to date with what’s available.
Alexander Hall has access to the largest range of mortgage products. The good news is that mortgage rates do not differ for self-employed applications, so there are some great deals available. Please click on this link to see what's available.
How an intermediary can help?
A good intermediary will know the lenders criteria for self-employed individuals, and so can ensure your application is steered to a lender comfortable with your scenario.
For example, some lenders will use net profit for limited company directors whilst some will take the salary and dividend figures as your income. This can be a big difference, and so not getting this correct at the start, can waste a lot of time and cause frustration when the borrowing comes back lower than hoped.
Most importantly, we have exclusive access to the decision makers and escalated service teams with many lenders. This means that by using an intermediary such as ourselves your application will be reviewed quicker than if you use a lender directly, and also that if any issues arise we are on hand to help smooth these through with the lender to avoid long delays.
We also have the experience of assisting lots of our self-employed clients in recent months since lenders began their more manual assessments, and so have the knowledge of who is more likely to be more favourable to your individual scenario and how to best present this to the lender.
One of the main issues self-employed clients often cite as a major frustration is the documentation requirements. This has become increasingly important now that lenders will do a more detailed assessment on applications for self-employed individuals.
A good adviser will ensure that documentation requirements are discussed in full with the lender pre-application to ensure there are no delays. They will also help a client in understanding where to obtain these documents and exactly what the lender requires. An adviser will also be able to look through the accounts like an underwriter, so that any questions the lender may ask can be spotted in advance.
Typical requirements that are good to have ready are:
• 2 years tax year calculations and tax year overviews. These can be obtained via your accountant or directly from HMRC. They can normally be accessed and printed out online, which is a real time saver.
• 2 years full company accounts (for partnerships and company directors). These need to be signed by the accountant and the company director.
• Accountant’s reference – some lenders will have an accountant’s reference template that can be used instead of the above, which can streamline the process
• 3 months’ personal and business bank statements.
• An updated CV and two-year records of contracts for contractor clients.
Client Q + A
As part of these series of articles we are hoping to answer as many of your questions as possible, as we know this is a worrying time and many of you are worried on the impact to your personal finances and mortgage.
We received lots of questions this week so apologies we could not answer them all. There are some common themes among the questions. Aside from more general themes which I’ve covered in this article, by far the most common two themes relate to mortgage availability for furloughed staff and for self-employed people, so I have selected an example to provide a comprehensive answer that covers both.
A client has said:
My husband and I sold our property in February 2020. In June we found our dream home and put in an offer. It was accepted but we have been waiting on a mortgage offer since June. We have a deposit of £80,000 and borrowing £300,000. I am a hairdresser (self-employed - I have owned my business for 10 years now) and my husband is employed as a key worker with no changes to his salary. We are now very worried that we might lose the house as all the solicitor paperwork is done and completed but we are still waiting on the mortgage offer. The underwriter has been back to our mortgage broker three times with different questions. We can see via our credit report that the underwriter has done a hard credit check twice. We are now waiting on the mortgage offer as I type. I have only opened (my business) back up from 4th July and don’t yet have three months' bank statements. Are we ever going to receive this mortgage offer?
This scenario is a perfect illustration of some of the issues and frustrations we are hearing in relation to applications for self-employed clients.
As a hairdresser, the lender will be aware that you had a period of no income during lock down and so will be keen to ensure that your income levels are now back to normal. Some lenders may decide that as your income will be reduced this year, they will lend based on a lower estimated income figure for this year.
Either way, the key is to have explained all of this pre application to the lender and then to give all of the information at once. The fact they have come back to you three times is a good sign, as if your scenario was outside of policy or one they were not happy with they would likely have declined the application at an earlier stage. They should now have all necessary information so you can push for a yes or no response.
The good news is that there are lenders out there who would be fine with your scenario. As such, the best thing to do is to keep chasing the current lender for a decision but also to look at a plan B lender.
Please get in touch with us if you need any further advice. You can email us at AskAlexanderHall@alexanderhall.co.uk or use the contact us page on our website – click here.
This article was originally posted in What Mortgage online. You can see the original article here. Please note this will launch a new web page.