There’s a perception that getting a mortgage when you’re self-employed is extremely difficult. But what if you’re self-employed and have a history of bad credit?
The good news for you is that having Bad credit and being self-employed does not make getting a mortgage more difficult.
The truth is once you are in a position of having to apply to a specialist lender because of bad credit or a low credit score, being self-employed will make very little difference as most bad credit mortgage lenders can often be far more understanding and flexible, especially if you only have one year’s trading history as self-employed as most high street lenders will require you to have been trading for a minimum of two years.
Applying to a bad credit lender can also potentially allow you to borrow more money if there has been a big increase in annual income, this is quite common when you have only been self-employed for a few years as it can take a few years for your income to become more stable.
It is for this reason that nearly all high street lenders will want to take an average over the past 2 years to calculate your income for affordability.
The good news for you is that most bad credit mortgage lenders will accept the income shown in your most recent years tax return for affordability purposes, this often enables you to borrow more.
The below scenarios demonstrate how beneficial applying for a mortgage to a bad credit lender which uses the most recent year for affordability vs most high street lenders that will insist on averaging the past 2 years.
For the purpose of the scenarios, we are assuming that two years trading history is available to assess and will use most lenders maximum loan to income ratio (LTI) to calculate how much a high street lender and bad credit lender may possibly lend to you.
However, as the Bad credit lender will use the most recent year for affordability £50,000.00 x 4.5 = £225,000.00 potential mortgage which is £56,250.00 more than the high street lender.
The extra amount that could be borrowed could be the difference between you buying your next house or being able to buy your forever dream home.
The key to any successful mortgage application is having a bad credit broker by your side that understands your specific needs and knows which bad credit mortgage lender has the best lending criteria to match you with whether that be due to your credit profile or your provable income.
Our bad credit mortgage specialist knows what the lenders want to see on an application and why they want to see it. Having this knowledge and understanding will ensure your self-employed mortgage application has a greater chance of being accepted if you have bad credit, low credit score even if you’ve only been trading for one year.
So, if you dream of owning a property one day but think having bad credit and being self-employed makes that unlikely, read on to find out how self-employed mortgages work and how we can help you.
Although it may take longer to prove to a high street lender that you have a stable income, being accepted for a bad credit mortgage as self-employed isn’t as difficult as you might think.
You may need to jump through a couple of extra hoops to prove your earnings. This is to reassure a mortgage lender that your income is sustainable and able to support the monthly repayments throughout the term of the mortgage.
Most high street lenders will want to see two or even three years’ worth of accounts for those who are self-employed. This is to help them work out an average income to determine whether you have a stable enough income to support a mortgage.
However, there are many bad credit or specialist lenders who will require just one years’ proof of self-employed income.
The lenders would prefer it if you had a qualified accountant dealing with your tax affairs and may also request an accountant’s reference for extra reassurance alongside your most recent tax calculation and supporting overview as part of your self-employed mortgage application.
This is why choosing a specialist mortgage broker who understands the specific lending criteria of each lender is so important to ensure that you are placed with the right lender so that you are not paying any more interest than what is required.
Just like a normal mortgage application, you will need to provide a range of documents to prove who you are, your income and your financial history.
The main documents required include:
Lenders may also ask about your spending habits to understand your lifestyle to ensure the new mortgage will not be placing you under financial distress by assessing your affordability.
They may ask about things like your household bills, holidays, commuting costs and committed expenditure such as personal loans, car finance or credit card debt.
This is typical for the majority of mortgage lenders and those who aren’t self-employed are likely to be asked similar questions.
But our specialist mortgage advisors can help you the right lender for your needs and circumstances. Adverse Mortgage Advisors fully understand the criteria for all the specialist lenders available in the UK and know what is required to deliver you a successful application.
With a self-employed mortgage application, it’s worth remembering that it’s your credit score or the adverse recorded against you that will determine the amount of deposit required and interest rate that will be offered to you, rather than your employment type.
However, as long as you offer enough information about your income and finances, and you have a good credit history, then there’s no reason why you wouldn’t get the same mortgage deal as someone who’s not self-employed.
When using specialist lenders for a self-employed mortgage because of bad credit, you’re currently looking at interest rates starting around 1% more than what high street lenders are offering.
Your SA302 or self-employed tax calculation, along with the supporting tax overview, is the most common way to show lenders the last two or three years of your earnings. They will be able to use this information to work out your income.
HMRC no longer issues these forms, so you need to request copies either from your tax advisor or download directly from the HMRC website or request to get it sent to your address.
Remember it is important to ensure that your tax calculations and overviews match or they will not be accepted by the lender, and they will request that they are amended which will delay your mortgage application progressing to the offer stage.
It is also very important that there are no tax liabilities outstanding as this will be shown on the tax overview and will be viewed negatively by the lenders underwriter and could lead to your mortgage application to be declined.
If you have questions about getting a mortgage with an adverse credit score, read our FAQs. Our wealth of knowledge within this market means that we’re confident in our ability to offer specialist mortgage advice and secure the mortgage you want regardless of your credit history.