Surely you should be able to get a mortgage if you’ve got money coming in, right? Think again, it’s rarely that simple for self-employed people. According The Guardian, 38% of self-employed people who were interested in getting a mortgage were concerned that they will never be able to get one.
Since the recession, lenders have been considerably more cautious before approving mortgages. This means that there are stricter regulations and criteria for everyone, and this hits the self-employed the hardest.
In the past freelancers had to use self-certification mortgages where you would simply tell the lender how much you earned. Due to abuse of the system, these mortgages were branded ‘liar loans’ because people would exaggerate their income to get a bigger mortgage. They were partly blamed for the credit crunch because in 2007 almost one in four residential mortgages were granted through self-certification, so the effects were widespread. They have since been banned by the Financial Services Authority, making it much more difficult for freelancers to get on the property ladder.
One of the problems is that different lenders have different ways of approving people. Some will only ask for a year of accounts, others will demand to see three years and then still not approve you. If you are new to freelancing and have been at it for under a year, you likely won’t get approved at all. Many freelancers are finding they have to rely more on their partner’s income and large deposits in order to get a mortgage.
What can freelancers do?
Hire an accountant
Lenders prefer you to have an accountant and often a certified or chartered one. They will help you keep your records in order so that you have something solid and credible to show the mortgage lenders. They may also be able to give you advice on how to approach lenders. While they will be able to advise you on how to be more tax efficient, you should also be careful of minimising your taxable income too much as this will affect your ability to get a mortgage. Check out our Accountants page.
Make sure your deposit is as large as possible. You may be expected to have a bigger one than normal employees because it’s easier to see their regular income and they are seen as less of a risk to lend to. Also, you are unlikely to get one if you’ve only been a freelancer for a few months. Concentrate on growing your business and client list first before you jump into trying to get a mortgage.
Keep a good credit and business record
A lender will do a credit check on you and your business. You should make sure you keep good records and keep a close eye on your cash flow. You should try to pay off any late or unpaid loans so that your credit score is as clean as possible.
Maintain a good client list
You will need to show you have a steady stream of income, which is harder to do if you’re a freelancer. However, with a good marketing plan, online presence, effective pitching and the ability to handle a variety of clients you can minimise the risks. Don’t just rely on one big client, they could go elsewhere, they could go bust and then you would be left with nothing. Having several clients at once means you have some to fall back and a bit of breathing room to find others.
You should think carefully about applying for a mortgage, talk with your accountant and be prepared to answer detailed questions about your business. You may still be rejected but you can shop around to find more flexible lenders.
Have you ever been approved or rejected for a mortgage? Let us know your experience in the comments and any other tips you would give freelancers looking to apply for one.