Getting a mortgage is not a cinch, even if you are a full-time employee. There are multiple factors that a lender will look at before signing off on your application. However, getting the nod for a self-employed mortgage brings a lot of challenges because you will have to prove that you have a strong income source.
Full-time people have fixed monthly income that clearly states how much money is coming in every month. After checking your monthly expenses, a lender can see if you will be able to pay back the mortgage on time.
Self-employed people do not earn fixed monthly income, and it is therefore quite challenging for a lender to understand your repaying capacity. However, it does not suggest that you are ineligible for a mortgage if you are self-employed. Some people assume that they cannot get a large mortgage when they do not have a stable income source.
Well, that is not the fact. A mortgage approval hangs on your repaying capacity. If a lender is convinced that you can repay the mortgage, they will not turn you down.
Who is self-employed?
It means you run your own business, and you have a particular share in your business profits as your monthly income. However, you do not need to be an entrepreneur.
You are in the category of self-employed if you run a shop or store, a director of a company, a contractor, and a freelancer.
How to increase the chances of approval for self-employed mortgage
It is surely complicated to get approval for a mortgage when you are s elf0employed, but you can improve your chances of getting approved for the mortgage.
Arrange a higher deposit
You know that you need to arrange a deposit of up to 10% of the market value of your house. As you are self-employed and your income is not stable, the lender will be suspicious about your repaying capacity.
You can arrange a higher deposit, up to 20% to 40%. This will whittle down the loan-to-value ratio, and the lender will likely approve your mortgage. Having such a bigger size deposit is not easy at all. The following tips can help you get back the track:
- Budgeting is crucial, so you do not overspend your money. Use an app, so it sends you reminders about due payments and alerts when you are closer to the spending limit.
- Cut back on discretionary expenses so you can utilize that money for your down payment.
- Do not let money be idle in your savings account. The present value of money keeps going down on account of inflation, so buy fixed deposits, which is safer than investing in stocks and mutual funds.
A higher deposit size reduces the risk of a lender, so chances of getting approval for a mortgage are higher.
A good credit score
You cannot secure a mortgage deal without a good credit score. If a lender goes out on a limb, they will charge higher interest rates. A bad credit mortgage can take a large chunk of your budget. Although refinancing is an option for you, there is no guarantee that you will be able to clinch a deal at lower interest rates.
Refinancing requires perusing your credit report and income statement. Even though you had paid down all payments of your mortgage when it was under a fixed period, there is no surety that your credit score will let you avail of lower interest rates.
Further, since you are self-employed, your business profits may have gone down this time. Of course, no lender would like to skate on a piece of thin ice when you borrow a large amount of money, and your income stability is questionable.
Best Mortgage Broker Online will require you to have a bigger deposit between 25% and 40%, depending on the lender’s condition. Yet, you cannot get approval for a low-interest rate. Otherwise, this will be an unfair treatment of good credit borrowers.
Increase your income
You should try to increase your income, so your lender does not call your repaying capacity into question. Your income is a certain percentage of your share of the business profits. You can show your repaying capacity by increasing your share in business dividends. This will easily convince a lender to sign off on your mortgage application.
Once you get the approval and you buy your house with that money, you can adjust your share in the company’s profit, ensuring you do not have difficulty repaying your mortgage payments. You can also brainstorm other ways to increase your income without increasing your share in the dividend.
For instance, you can increase the prices of your product. This will help more cash come in. However, your sales should not plummet. If you increase the prices, you should justify them with increased quality.
Instead of increasing the prices, you should try to reduce your operation cost. For instance, find out the ways to whittle down the raw material cost, inventory, cost, and the like. Likewise, if you run a company, you can save on rent by asking your employees to work from home if possible. The money you save on the rent and energy expenses will reflect in your business profits, and as a result, your income will go up.
Consider a co-applicant
You can include your spouse as a co-applicant in your mortgage application, and it will increase the chances of getting approval if your spouse is a full-time employee. The first name of the application should be your spouse.
Even if their salary is not as high as yours, the fact that they have a stable income source will qualm doubts about your repaying capacity. Since you both have your names on the mortgage application, the lender will check the credit rating both.
If you both have a good credit score, you will likely get the approval for a mortgage at better interest rates. Before you apply for the mortgage, you should carefully check if you can afford to pay down monthly payments. Use amortgage calculator for self-employed income.
This will help you know how much you will likely be paying down each month. The actual payment will be more than the estimated one because of processing fees. Grab your bank statement and see if your budget has room to fit this new expense.
Take Advice from a counsellor
A mortgage is a very big loan, and it is the most expensive debt. If you fail to pay down the debt, you will end up losing your house. Your credit score will also be badly affected. It is suggested that you do not take an impetuous action.
If you are not sure whether or not to put in the mortgage application, you should talk to a financial advisor. Consult a mortgage advisor in Edinburghthat will review your application before making any suggestions.
They may check your credit score, but that does not pull it. You will have to provide them with your income details so they can easily decide the size of mortgage you can afford. They can suggest to you some ways to improve your chances of getting a mortgage, or they may also suggest putting it off for some time.
The bottom line
Getting approval for a self-employed mortgage can be difficult, but there are specific ways to improve your chances. You should increase your credit score, arrange a bigger deposit size, increase your income, and try to get a co-applicant.
Consult a financial advisor to know the favourable time to apply for a mortgage. Their suggestions will help make a better decision. It is not a cinch to handle monthly payments for a period of 10 or more years. It is vital to deliberate over it.
Description: It can be challenging to get a self-employed mortgage, but it is not impossible. There are some ways to increase the chances of approval.
Molly Harris, the professional loan officer and author having more than a decade of experience in her career. She has the passion of solving the problem of those who are looking for the best mortgage while visiting Shinemortgages. She works hard while searching for the best loan solutions tailored to her clients’ financial goals. From first-time home buyers to seasoned investors, Molly’s expertise and dedication cannot match anyone. One can read her research-based blogs here and get the proper guidance. Molly Harris has possessed Master’s degree in Finance field and currently pursuing doctorate research on the UK mortgage.
