For those of you in self-employment, getting sick of the banks, high street lenders and any institutions favouring the typical slave to office hours, there’s an almighty tool that can have you accessing better rates, on better terms… and you may already be using it.
Let us ask you this…Do you know what the cloud is?
If you run your business the modern way, you will. If not, get on board. The cloud is available in a variety of services and sectors. There are apps for almost anything and more software offered as a service too.
Cloud accounting applications are what you’re interested in for the mortgage market. There are none specifically developed for mortgage applications but with cloud accounting, it’s all in how you apply it and what you do with it that makes it all the more powerful.
Getting A Mortgage If You're Self-Employed
Post-credit crunch, it has become trickier for self-employed workers, freelancers and contractors to get a mortgage – but it's not impossible
It doesn’t matter what size your business is, you can use this and even paying premium for top notch accounting software, you get value tenfold when you’re accessing mortgage rates with real time information.
If you manage employees and run payroll, you’ll most certainly know about RTI because it’s directly linked to payroll and as such, you’ll need cloud accounting in place to process RTI. The HMRC have a list of software services they recognise, although they will never recommend any specific vendor. You need to research each yourself to decide on which is best for you. That list is at https://www.gov.uk/payroll-software.
This information isn’t about cloud specifically, so if you need a crash course and overview of it, see this guide from the UHY Hacker Young Group.
Being self-employed means you need to control your finances. When you do that with software, you can then have all your sales and operational costs updated in real time. That’s where the magic is because without it, you’re likely applying for mortgages with a set of last year’s figures, sometimes even longer.
With up-to-date transactional and operational figures, lenders can see how you’re really doing and if you’re going places, your figures will be stronger than what you have on paper from last year’s financial overview.
This is the same practice that is being utilised by landlords to manage property portfolios, so as you can imagine, there are budget controls worked into some software packages. To see an example Xero has a how-to video on managing budgets, loans, and mortgages here.
Approach any lender with a mortgage enquiry and mention the words self-employed and some advisors will not want to know you. Some can be paralysed with fear because it’s venturing into the unknown. You’re a risk and they know it therefore want no part of it.
It’s easier to bankroll someone with a consistent income shown on P60s and payslips. The problem with lenders is what’s on paper. For example, the Mortgage Advisory section of Which, which most people are familiar with the name, states “In theory, self-employed borrowers have access to exactly the same range of mortgage products as everyone else”.
How that statement starts says it all really “In theory”. Well in theory and in practice are two almighty different things as you may have already discovered.
If you have difficulty proving your income we would like to hear from you:
Lenders are supposed to do a lot of things, but many of the things they’re supposed to do, get overlooked. The onus is on you to provide a set of consistent figures.
Most lenders will request a minimum of two years tax returns, income statements, and if you’re incorporated, they’ll want to see your Companies House information too, along with SA302s, and to top it all every application will have a hard check stamped on your credit report.
You can access your credit reports with any of the credit reference agencies, but if you want to track it for changes, it’s going to cost.
Instead of paying out even more expense, be sure that when you’re comparison shopping, you are careful with your choice of words when speaking or dealing with any advisor.
Here’s how James Jones, Head of Consumer Affairs at Experian describes credit checks when asking a lender about mortgages…
“If it’s “if I apply for a mortgage what rate am I likely to get?” Then you are merely requesting a credit quotation and, if they need to check your credit report to provide this, the footprint this leaves behind won’t affect credit scoring. If, however, the question is “will you lend me this amount of money?”
Then that is usually treated as an application – even if it’s only described as a decision in principle – and you should expect this to leave a credit-application footprint on your report, which can be used to help work out your credit score”. Source: http://www.experian.co.uk/consumer/questions/askjames304.html
When you apply for any form of credit, there are two types of credit check that can be done, a soft check and a hard check:
A hard check of your credit report will always show up. These become problematic when you hit up a handful of lenders with applications, all being run in a short time window. They are documented and to the suspecting eye, i.e. the lender, it looks like you’re desperately in need of a cash injection and they’ll turn the other way.
A soft check though, while it is documented on your credit report, it doesn’t count towards your score. For that reason, you need to be certain that when you are asking for a quote, you are not requesting consideration for an application. You only need to know the likelihood of what rates they could offer and you do not want that to be their official offer. If you want an official figure, a hard check needs to be done which requires a real application.
Soft checks are enough for lenders to give you a rough guide on the loan terms they could offer. The downside is you aren’t guaranteed the rate offered, unless a thorough credit check is completed. It’s only when you make a bunch of applications, your credit score, well, tanks.
For that reason when comparison shopping for the best mortgage rates you do not effectively ask for a Decision in Principle, which is an offer open for acceptance. Quotes with no obligations attached are what you want to be asking lenders. To be absolutely certain, ask the question about the credit check. Will they do a soft check or a hard check?
Only permit a lender to run a hard check on your credit report when you’re seriously considering doing business with them. Until then, keep your score protected and heed the advice of James Jones.
Worth repeating - if I apply for a mortgage, what rate am I likely to get?” Not what will I get, but a guestimate.
When you take this approach to get only a soft check and combine it with your up-to-date figures, and historical trading history, you’ll be able to show – in no uncertain terms – that your self-employment or contracting is consistent, or if there’s dips in certain months, that your business always recovers.
That’s the real benefit of using cloud applications to keep current trading data updated with what you’re doing now, and have done in the past.
It gives you the power to sit down with lenders and even log into your account using your mobile phone and say look – there’s all my figures. What months do you want to know more about? Find that out and run a custom report. If you’re queried on a downturn, it could be a higher operational cost, in which case, you can query your expenses.
In all cases of cloud accounting applications, they can be tied into your business bank account so all income and expenses are updated.
There are a handful of select lenders that are more than comfortable lending to those in self-employment, many of which we partner with, however if you aren’t looking for a specialist provider and focusing on high street lenders, you’ll need to harness every available tool you can get your hands on to provide a well-documented financial overview of your business, in order for them to feel comfortable lending to you. And that case must be well presented on paper because the advisor you meet with will not be the only person involved in decision making.
In fact the decision is often left to the computerised system to run the risk assessment as lenders have their own risk criteria you have to get past.
Computerised systems are mainly what run the financial sector. There’s far less human input now than there used to be so you can forget about good old fashioned empathy. The only true tried and tested way to access finance is through solid data. The more data you have, provided it’s good data, as in positive cash flow, the better access you’ll have to mortgage products at fair rates.
Should you want or need an easier and a faster route into mortgage financing, it’s worth considering specialist lenders who can meet the unique needs of those in self-employment. You can find out more about that type of financing on our Self Employed Mortgages page for more on that type of finance.
Our friendly FCA-Qualified advisers will help you get the right product for your circumstances.
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