You can’t understand someone until you’ve walked a mile in their shoes. Let’s look at mortgages in a different way; from the perspective of the mortgage lender rather than the borrower. If you can understand the lender it will help you when you want to make your application. We will focus on two ‘problem’ areas for many clients; self-employed mortgages and bad credit mortgages.
Let’s clarify what a mortgage actually is. A mortgage is a loan that is secured against an item of value, and here we are talking about mortgages secured against residential property. The property is legally owned by you and it has a mortgage loan secured ‘against’ it. If a lender is going to grant you a mortgage the first thing they are going to think about is: “what is the property like and how much is it worth?”
The value is affected by the age, construction, location, condition, and the demand for that type of property in that area. A lender thinks ‘worst-case’ therefore they will value a house mainly on how much they could sell it for and how quickly they could sell it, should they have to repossess it.
The next thing they worry about? – The borrowers – that’s you.
They want to see wage slips, bank statements, and look at credit files is so they can assess whether you have enough disposable income (spare cash) to make the mortgage payments over the full term of the loan. By looking at your credit history they also want to figure out if they can trust you and if you are a good risk.Consider this; theydon’t really know you, so the only assessment they can make is based on your age, employment type and financial history. If you want to impress a mortgage lender, you should have permanent employment (a steady job), have a good history of using credit.
So, what happens if you are self-employed or have bad credit?
Self-employed mortgages are no different from any other. The only thing that is different is that lenders find it more difficult to work out your income. Depending on your type of self-employment, income can be erratic. Most self-employed people can’t guarantee their income like an employed person on a salary can. To further complicate things, lenders will calculate income differently depending on whether you work as a sole trader, partner, or Ltd Co director. So how do they work out your income?
If you want a self-employed mortgage:
- Sole Trader: If you are a sole trader, they need to see 2 years of your tax return summary. Some lenders use the latest year’s figures, others use the 2-yearaverage, unless turnover has dropped in which case they will use the latest year alone. Some might allow just one year’s history.
- Ltd Co. This is where self-employed mortgages can be complicated. If you are a shareholder with at least 20% shareholding you will classed as self-employed. Don’t make the classic mistake of thinking that you can put yourself on the payroll of your own company and submit your self-created payslips. No; lenders will want to see your tax documentsand the full set of accounts. And here’s the tricky bit; to work out the income, some lenders will use ’Salary + Dividends’, others will look at ‘director’s salary plus share of net profit after tax’ and some will even use ‘salary plus share of net profit before tax’.
- Note – There are some lenders that specialise in helping the self-employed and will offer a greater degree of flexibility in their approach.
In summary, self-employed mortgages need the following:
- 2 years trading history that show you making a profit.
- Patience and a good accountant.
- Absolute must – Getting the services of an experienced broker early in the process to help you to plan. Many of my own self-employed clients engaged with me at least six months before they were looking to start their property search.
That wraps up self-employed.
Let’s look at how to arrange a bad-credit mortgage.
The ups and downs of life can affect many people’s credit scores. And it’s not just something that happens to people on low incomes. It’s not always about CCJs, defaults or payday loans. Forgetting to make a single credit card payment and paying a few days late can rule you out of borrowing with many high street lenders for between 6 and 12 months.
If this is the case for you, who do you turn to for help with finding a bad credit mortgage, and what do these look like?
There are a several specialist lenders that have products designed for people with a poor credit history. They have tiers of product types that depend on what type of credit issues you have had, for how long you had them, and when you last had them. So, for example a high street lender might not accept an application where a client has had a default in the past 6 years if it was over £500, whereas another lender is happy to accept one of up to £2500 if it was over 2 years ago.
Top things that make a bad-credit mortgage difficult to get.
Here are the top things that will make even the specialist lenders deny you credit.
- Bankruptcy or IVA (individual Voluntary Arrangement). Getting a mortgage if you have been bankrupt is almost impossible until after 6 years have lapsed. And don’t think that and IVA is any better. It has the same effect as bankruptcy.
- Payday loans. Even the specialist bad-credit mortgage lenders do not like to see payday loans on the credit file.
- ‘Arrangement to Pay’. This is where you ask your creditors to accept a reduced amount as full and final settlement for outstanding debts. Lenders do not like to see these.
Here are the thigs that bad-credit mortgage lenders will generally accept.
- A small number of missed payments on unsecured credit like personal loans and credit cards.
- Old defaults, especially when associated with old utility or mobile phone debts.
- Count Court Judgements (CCJs) – depending on how often.
- Some missed payments on secured debts, like mortgage payments, but only perhaps 2 in 2 years.
What steps to take?
- First, find an experienced broker that understands this market. Ask them how many bad-credit mortgages they have done in the past year.
- Download your credit report from Checkmyfile
- Send that to your broker.
- Get the advice well in advance of when you might want to look for a house.
- Have a good deposit. Bad credit mortgages do not come with 5% or 10% deposits. Normally you need at least 15% to put down if you have bad credit.
- Work with your broker to plan the fixed rate period so that when this bit ends, your credit rating should be back to normal.
In summary, many self-employed people or people with bad credit scores think it is impossible to get a mortgage. It isn’t. But do find a broker you can trust to help you.