Self-employed home buyers face mortgage squeeze: ways to get accepted

It’s becoming harder to obtain a mortgage if you’re self-employed, with Santander the latest lender to tighten its criteria for self-employed and freelance applicants.

The move comes after a series of banks introduced new lending rules in the wake of the latest COVID-19 lockdown.

Here, Which? explains how recent rule changes affect self-employed mortgage applicants while offering advice on increasing your chances of getting accepted.

Santander limits self-employed borrowers to 60% mortgages

Self-employed applicants will only be in a position to borrow up to 60% of a property’s value under tough new rules created by Santander.

This means you would require a deposit of 40% to obtain a mortgage – that’s just under lb100,000 on an average-priced house.

Santander says the alterations are temporary and have been brought in due to the complexity of self-employed applications.

Helen Harrison of Santander says: ‘Due to the additional paperwork involved, applications from self-employed customers can take longer to review and, in view of our current service times, [the] changes will ensure we are able to progress existing applications as quickly as possible.’

The new rules won’t modify the bank’s existing customers when they arrived at remortgage.

Santander currently allows employed applicants to try to get loans at up to 90% loan-to-value (LTV).

Have other banks changed their lending rules?

Self-employed people have always needed to jump through more hoops to obtain a mortgage, but these struggles have been exacerbated by the COVID-19 outbreak.

The pandemic is responsible for two big issues for lenders: they’ve needed to reduce their risk at any given time of economic uncertainty, and they’ve struggled to keep up with demand from applicants and queries from existing customers.

This has led to some lenders putting limits on their mortgage deals, and self-employed borrowers are the type of worst affected.

Some of the other restrictions in position with other lenders are as follows:

• Halifax: self-employed borrowing is limited to 4.49 times annual income.
• HSBC: not currently lending to self-employed applicants whose income continues to be impacted by the recent tightening of COVID-19 rules. Applications will reopen following the lockdown ends.
• Nationwide: self-employed applicants can borrow up to 85% LTV.
• Natwest: if a self-employed applicant has had a Self-employed Income Support Scheme grant, the proceeds won't be considered as income.
• TSB: self-employed applicants can borrow as much as 75% LTV. Borrowing is limited to 4.25 times annual income.

What’s changed with self-employed mortgage applications?

As along with setting strict limits on how much self-employed people can borrow, banks are also enhancing the amount of diligence they undertake before signing off on loans, meaning the procedure could be more difficult and take considerably longer than ever before.

Will Rhind of the online large financial company Habito says: ‘Banks happen to be asking self-employed applicants to complete a questionnaire before you apply to allow them to make an initial assessment.

‘When someone does make a full mortgage application, we’re seeing just about all cases are being known manual underwriting, which generally takes longer to approve.

‘Instead of relying on a company’s turnover from the past 2 or 3 years to make the assessment, lenders are actually also reviewing turnover within the last three or 6 months to ascertain if there has been a significant change since lockdown restrictions were implemented.

‘If the applicant has had financial support in the government or maybe their business completely closed during lockdown, lenders seem to judging them more harshly.’

Five tips on boosting your mortgage chances

1) Make contact with a mortgage broker

Navigating the mortgage market can be a challenge, and that’s especially the case if you’re self-employed.

With this in mind, it’s can be useful to seek advice from a whole-of-market large financial company.

A good broker can assess your financial circumstances to pinpoint which lender is probably to provide an offer.

This can help you save a lot of time and prevent failed mortgage applications, which can leave an indication on your credit history.

2) Make use of an accountant

With lending rules getting stricter, it’s more essential than ever before to ensure your numbers add up.

Some lenders will only consider applications if you've got up-to-date accounts signed off with a certified or chartered accountant.

It's common for accountants to legally minimise your declared income so you'll pay less tax, but be warned that lower profits on your accounts could affect what you can borrow when trying to get a mortgage.

3) Get the paperwork together

It's essential to get your annual tax calculations together for every year of accounts.

Lenders will often require 3 years of accounts, so you’ll have to be able to provide three SA302 forms, which show you annual tax calculation.

If you file your taxes online by self-assessment, you can print these off by logging in to your account, but if you file by post you’ll have to contact HMRC.

4) Save a bigger deposit

The bigger your deposit, the simpler you’ll find it to obtain a mortgage.

In the current market, you might need a deposit with a minimum of 15% to obtain a mortgage like a self-employed applicant.

If you haven’t been self-employed for long or even the pandemic has significantly affected your income, you may need a considerably bigger down-payment.

5) Make certain your credit report is up to scratch

Before trying to get a mortgage, ensure things are correct in your credit history. For example, are you currently around the electoral roll at the current address?

There are lots of things you can do to enhance your credit file, including paying down outstanding debts and closing dormant accounts.

Be careful about your spending habits around before applying for any mortgage, as lenders are more likely to bear this in mind.

Best and worst mortgage lenders

Taking out a home loan is a big commitment, so you’ll wish to ensure you’re applying with a lender that combines bargains and looks after its customers.

For our mortgage company reviews, we analyse the very best deals available on the market in a selection of scenarios and survey the public concerning the quality of the bank’s customer support.

Check out our full mortgage company reviews to discover lenders that achieved coveted Which? Recommended Provider status.