Mortgages for the Self-Employed – 6 Things To Do Before You Apply!

UK Self-Employed Mortgage

By Ed Emerson

So what are the most important things you should do when you’re looking for a mortgage while self-employed before you apply, in order to give you the greatest chances of success? 

Well, first of all there’s a old saying known as the “Cockroach Theory.”

It asserts (certainly to anyone who has lived in an apartment in Manhattan!) that:

“Where’s there’s one cockroach that you can see, there are likely hundreds close by that you can’t.”

Yuch, right!

But nowhere is this theory more relevant than in the banking sector.

When folks first thinking about applying for a mortgage while self-employed, it’s those things that seem either trivial, or about which you are unaware of, like late or unpaid bills, whether or not they’re yours that can raise red flags during your application and lead to unnecessary scrutiny and even a higher borrowing rate.

So here’s your “MUST DO” checklist before you apply for a mortgage for the self-employed:

Your Credit Report

Lenders will always look at your credit history to judge the strength of your financial situation. In the UK there are three main credit reference agencies – Experian, Equifax and Call Credit.

Each can hold slightly different information about you, and sometimes there are errors.

What you do not want to discover after you’ve applied is a mistake or other outstanding issue that then needs to be resolved during the application process.

By then the damage could be done. Each of these agencies have methods for requesting changes to your credit report. They are reasonably helpful but the process can take time.

What You Should Do

Getting hold of your credit report from each of these agencies is easy enough online, but can get quite expensive.

The only whole-of-market credit reference company that I’ve found is called Check My File – which is recommended by Money Saving Expert as well.

It costs only about half the price of a monthly subscription to any one of the above credit reference agencies, and it gives you information from across all of them.

Don’t waste your time and money on multiple purchases of credit reports from different agencies when chasing down a mortgage while you’re self-employed. 

The other routes include writing to get your reports sent in the post from all three agencies (which I believe costs £2 per go) and a company called Clear Score, which is gaining a lot of momentum for its free-to-use service, but it only considers Experian (and not the other credit reference agencies).

Check My File is the cheapest and most convenient route!

UK Self-Employed Mortgage

Your Debts

In simplest terms, the less you have going out the more a lender will see you can afford.

Now, there is no problem with paying off debts in the run up to applying for a mortgage when you’re self-employed.  

In fact, lenders may see this as proof of your improving financial strength in that you are able to do so, as well as through what they may assess as increased money available to you without those additional financial outgoings.

What You Should Do

Be realistic. Count up everything you have going out and look at that number relative to your income (what you pay yourself, not what’s coming into your business account).

Is there room for adjustments? Can you either pay down debt if you don’t see a lot of flexibility, or increase your wages?

If so, in either instance get this process going for a few months before you apply.

Track record and steady guaranteed income is everything. The banks want to see consistency.

Your Children

There has been increased focus on the costs of children and associated childcare following the introduction of the Mortgage Market Review (MMR).

Dependent children are factored in heavily as a percentage of likely outgoings required to support them.

What You Should Do

Be sure that you have your numbers tight on what any childcare costs are and, if possible, the inclusion of relatives or others who live close by or provide regular support to reduce this figure in the banks’ calculations.

Your Social Habits

Did you know that in the Far East they have credit profiles based on social media activity? It’s true.

While it’s unlikely that your Facebook profile will come up in conversation at a mortgage interview, your social spending habits likely will.

Lenders now want to know in some detail about how much you spend on holidays, weekly/monthly entertainment (movies, clubs, gyms, eating out), social events, donations, the golf club membership and the like.

What You Should Do

Make sure you are clear on those numbers and that your personal account matches your lifestyle expenditures.

Job & Income Stability

While paying off debts in the run up to a mortgage application is fine, as is an increase in your monthly wages, contract value and/or regular dividends, drastic changes in your financial circumstances to the downside do not bode.

What You Should Do

Get your income stable or growing and don’t change jobs in the run up to an application – unless it’s for a long-term contract of 12 months or more.

Electoral Roll

Banks and building societies will use this to verify your identity, so make sure you are listed before starting the mortgage process and avoid problems later on. This can be done quickly and easily by contacting your local council.

Get these sorted. Successful mortgage applications by contractors are about preparation, and then some perspiration.

Want to know more? 

Why not see what HNW Magazine’s Mortgages for the Self-Employed section here has to offer you in terms of advice, guidance and options.

And look out for HNW Magazine’s report The 5 Steps to Getting a Mortgage When You’re Self-Employed for consultants, freelancers and entrepreneurs, out soon, and take advantage of the mistakes others have made so that you don’t have to.

Ed Emerson, Editor, HNW Magazine

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