Self-employed borrowers face tough times

The self-certification mortgage has all but disappeared, making it harder for people to get a home loan if they are unable to prove their income. Esther Shaw investigates
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As any self-employed borrower applying for a mortgage will testify, getting a home loan has become much harder.

Self-certification mortgages, which do not require borrowers to prove their income, have all but disappeared.

In the past, these loans – dubbed "liar loans" because many people lied about their earnings – were a vital source of funding for the self-employed. However, in July this year, the Financial Services Authority (FSA) published a report saying it wants borrowers to be able to prove their income. While this mortgage market review is still under consultation, these home loans look destined to become a thing of the past.

"For a large proportion of self-employed individuals, it is going to become more difficult to get a mortgage now that self-certification has disappeared," says Andrew Montlake from broker Coreco. "A lot of people are going to become 'mortgage prisoners' who can't remortgage to another lender because they don't have the necessary account information to satisfy a new lender."

Melanie Bien from broker Private Finance warns that the newly self-employed will be among the hardest hit as they may not have built up sufficient records. "It's going to be a real struggle to get a mortgage, and you will have to delay for at least a year, if not more, depending on the lender's requirements and your business performance," she says.

Ray Boulger from broker John Charcol adds: "Self-certification mortgages allowed applicants to state their real income, not the 'massaged down' post-expense figure reached by their accountants. Now lenders will make decision only on the income you can prove."

While the demise of the self-certification sector leaves the self-employed with fewer options, it's not impossible to get a mainstream mortgage; you just need to be able to prove your income. "Ideally, you need to provide at least three years of accounts or tax self-assessments," says David Black from financial analyst Defaqto, "although some lenders may be more lenient where the maximum loan to value is 75 per cent."

When applying, you will need to produce documents to back up your income. "The key is to build up a good picture of your track record," says David Hollingworth from broker London & Country. "This is crucial to the lender's decision over whether or not to make an offer. A steady or rising income is always preferable to big fluctuations from one year to the next."

If you are part fully employed and part self-employed, the lender will proceed in the normal way with your employed income, and then look at the self-employed income. "But if you've not been self-employed for long, a lender may ignore this," says Mr Boulger. "The lender will want to know whether you're going to be able to sustain both parts of your job."

To help your case, Ms Bien recommends gathering proof of future contracts and experience in that particular field. "All this will paint a more compelling picture," she says. "You can also make yourself a better prospect by holding your business account with the same lender, and by building up a sizeable deposit. Lenders still prefer those with at least 25 per cent."

If you're having difficulties, an independent mortgage broker will have a much better understanding of each lender's requirements. "Advice is particularly important in helping the self-employed navigate lender criteria," says Mr Hollingworth. "A broker should be able to get better access to the underwriters making the decision, plus you also avoid blighting your credit file with a growing number of searches."

While your choice of lender really depends on your particular situation, there are certain lenders which may be worth approaching first. "If your case stacks up and you are credit-scoring well, Halifax may be prepared to accept just one year of accounts, and take a projection from this," says Mr Hollingworth. "Self-employed borrowers could also consider contacting the Woolwich, Nationwide and Clydesdale." Mr Black recommends steering clear of the computer-driven lenders; these tend to be the larger lenders. "They take a 'computer says no' mentality, whereby if you fall marginally outside the required eligibility criteria, you're likely to get turned down," he says. Smaller banks and building societies tend to take a more "human" approach.

Mr Montlake says this is where brokers can come into their own. "It is their job to get all the information they can about a borrower and his financial situation, and build up a case as to why the lender should lend to the client," he says. "Admittedly, this tends to work better for high net worth individuals, but over time, more mainstream lenders will take steps to try to help self-employed borrowers."

The good news is that if you can satisfactorily prove your income to the lender, you'll be able to access the same rates and products as salaried employees. "The bigger the deposit you have, the better the mortgage rate. If you are self-employed, the bigger the deposit you have, the more likely you are to be successful in your application," Ms Bien said. Better still, you will not have to pay the premium levied on self-certification mortgages.

There are concerns that once the FSA's "responsible lending" criteria are introduced, it will get even harder for the self-employed to get a mortgage. "You will have to demonstrate that your income can meet your outgoings, and the maximum you can borrow will be based on the month of lowest income," says Mr Boulger. "This will be a huge problem for those with a fluctuating income. My advice would be to move quickly and remortgage sooner rather than later."

Case Study: Rejected - It took three attempts to get a mortgage

Edward Bettison, who runs his own graphic design business, was declined by two lenders.

The 35-year-old began looking for properties about a year ago with his partner, Anya, and their two-year-old Kip. Having found a place in Brighton, the couple got in touch with a mortgage adviser. "I've been self-employed for the past five years, and kept detailed accounts for all of that time," says Mr Bettison. "We'd also managed to build up a sizeable deposit of about £44,000."

Their online application was rejected. Concerned about the impact a second rejection could have on their credit reports, Mr Bettison approached his own bank. "I hold both my business and personal bank account with Alliance & Leicester, so they know my financial history," he says. "But once again we got rejected by the online system, and it was only when we lodged an appeal that we were told it was because I'm self-employed."

Fortunately, when the couple contacted broker London & Country, it was a different story. "The adviser spoke directly to the lenders and explained our circumstances, and came back with an offer in four hours," he says.

"We now have a fixed-rate mortgage with NatWest at 5.65 per cent until 2013."

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