Self-employment is usually considered a risky employment status by the lenders. Especially when it comes to big amount loans like mortgages, finance companies prefer to act reluctant. But the reality is reality. It is a fact that not everyone lives the life of a salaried person.
Many people have their businesses, does that mean no self-employed can ever buy a home? No, that is not fair, and that cannot be true. After all, in that case, the mortgage industry can miss the business on a considerable part of the population.
Two main reasons that self-employed people face problems in obtaining a mortgage
Two common reasons keep the self-employed people from attaining funds. These are:
- The lenders do not understand the type of business. There are some prevalent types that they keep in their list in the category of business.
- The mortgage companies do not agree on the source of income. Maybe the mode of payment through which the businessperson gets the money or perhaps some other reason becomes the issue.
If the property you wish to buy is overseas this can be particularly difficult. Using the services of an expert overseas property and finance specialist like simon conn makes life considerably easier when it comes to securing the international mortgage that you need.
The ‘how to qualify’ suggestions
In some or another way, the solution is necessary to appear. There are a few ways through which you can also get a mortgage if you are self-employed.
Keep your business financial accounts ready and flawless
Your business accounts are the first place to get the attention of the mortgage company on your mortgage application. They have to look perfect and clean in many aspects.
- At least two years of business accounts should be ready to show
- Pay the business debts on time, and no penalty should be there
- Maintain the entries, do not leave them pending.
- Keep business finances separate from personal finances
- Show enough capital as that shows the financial strength of the business. The amount should be equivalent to 3 months of business expenses.
- Show your share, but that should be as low as possible.
Tax returns decide the loan amount you qualify for
To approve your desired home loan amount, the lenders need to know your monthly income. For that, they do several calculations of your tax returns. It goes like this –
- The lenders ask to provide the tax return copies of at least two years.
- They notice your gross income mentioned on every form
- They add the two numbers (number of tax returns and gross income) and divide the sum by 24, which give your monthly income.
The monthly income obtained from the above calculation makes the lender decide the loan amount you can get.
Keep a good credit score (personal one as well as of business)
As a self-employed, you need to play on the two fronts on the part of credit score. Your credit rating, as well as the credit score performance of your business, should be perfect. However, nowadays, bad credit home loans are also available.
To play safe as an applicant of the mortgage for self employed in the UK, you need to work hard on the aspect of payment records. After all, they show your repayment capacity, which is the prime concern for every lender.
Pay off the old debts or make big part payments
The creditworthiness of the mortgage applicant is the most critical factor. You cannot fill a glass with water if it is already full. You need first to throw the existing water, if not wholly, at least a considerable quantity to pour the new pool in. Same is the case with the debts. A home loan is a significant amount of obligation and to get into your list of debts; it needs a big space.
From credit card pending payments to a personal loan, business loan, car loan, etc. whatever it is, handle them well. The best is to pay off as many old debts as possible. If it is not possible in call of all financial commitments, then make part payments.
This trick not only makes way for easy approval of mortgage but also shows your financial efficiency to tackle the debts. As a result, you may get a more significant loan amount without any compromise.
Guarantor is necessary
Even if you have a good credit rating and an excellent monthly income from the business, the guarantor is a must. There is no second thought on this condition. Lenders will surely ask for a person who can back your loan application. Even the excellent credit score people need to go through the same procedure.
Your guarantor too needs to qualify on the following parameters to support your mortgage request –
- His/her payment history should be flawless
- Income should be in prominent figures
- The debt-to-income ratio should not be lower than 60:40.
- There should be a big loan on his name
- He should be in employment from at least the last two years
NOTE – Regarding your debt-to-income ratio, that should also be in good condition. The idol is always 70:30, but yes, again, the 60:40 too is not bad.
Deposit money – how can you forget that?
To talk directly about the actual thing, you need 5% the minimum amount that is required as the deposit money. As for a self-employed, situations can be difficult. It is advisable to arrange more than five per cent of the property value. You cannot be careless on this part, as this is the first formality to complete when you buy your home.
According to your circumstances and the business situations, the lender may expect you to contribute a more considerable amount. It becomes even more critical if the lender does not have a good understanding of the type of business. It becomes one of the biggest causes of denial. Why take the risk? Stay on your toes and make all the necessary arrangements in advance.
The above collection of information, terms and conditions are unavoidable for a self-employed. If you know them beforehand, it is easy to stay prepared and improve chances of loan approval. Rejection can suck the chances of attaining funds from the other lender too, thanks to the search footprints.