Buying a house as a freelancer can be daunting, to the point where a fifth have considered changing their job to enhance their odds of securing a mortgage.
That’s according to a brand new survey by The Mortgage company, that also discovered that 73% of freelancers believe mortgage brokers might discriminate against them due to their employment.
Which? explains how freelancers can enhance their chances of successfully trying to get a home loan.
Freelancers fear mortgage rejection
Freelancing is becoming ever more popular in the UK, with ONS statistics from 2022 showing 4 million people were self-employed with no employees.
Yet for many freelancers, purchasing a house can seem like an impossible step.
And now, a new survey by The Mortgage company claims 21% of freelancers have reconsidered their employment situation because of worry about securing a mortgage.
On top of this, a quarter of freelancers said they believed they would be refused a mortgage if they applied.
And of those that had previously made a credit card applicatoin, 45% said they had found it difficult to provide the documents the mortgage company needed – and merely under 3% reported being ultimately rejected.
Why could it be tougher for freelancers to obtain a mortgage?
When lenders evaluate your mortgage application, they look at your income sources, how much you earn and how reliable that income is, before ultimately deciding whether you’ll have the ability to repay the borrowed funds.
As a freelancer, you may appear to be a riskier prospect to a lender than someone in full-time employment, even if you’re earning many possess a successful history of winning clients.
In certain cases, this might mean lenders are unwilling to approve financing.
But don’t despair – you've still got options. Below, we set out our some tips for freelancers trying to secure a home loan.
Tips for freelancers applying for a mortgage
1. Know how your earnings is calculated
Lenders will need to assess your income to work out what you can afford to repay. The approach they will use will depend on whether you’re operating a business, are in a partnership, or are a contractor.
As a contractor, lenders are likely to average out the income you’ve earned over the past few years – though they might pick the most recent, or even the lowest, based on your particular circumstances. If you charge a day rate, some lenders may be prepared to calculate this to a year’s price of income to assess your potential earnings.
If you take a business, you’ll have to show a minimum of two years price of accounts, ideally having a consistent or increasing profit.
2. Use an accountant
It’s vital to possess a certified or chartered accountant ready your books. Many lenders won’t accept accounts that haven’t been signed off by a cpa.
But remember that accountants may aim to legally minimise your income for tax purposes, that could backfire when applying for a mortgage, so talk to an accountant early regarding your plans.
3. Avoid gaps inside your contracts
Taking time off whenever you want is among the advantages of having your own business.
But lenders may wish to see a consistent pattern of revenue – or if, you’re a contractor, of employment – so try to minimise big gaps in your activity in the year before applying for any mortgage.
4. Complete three SA302 forms
The SA302 form provides proof of your annual self-assessment tax calculations. Most lenders expects to see the last three years of calculations, though some may take two.
Generally, you’ll need to show evidence for the last tax year, which may mean filing early. So, for instance, your tax return for 2022-18 isn’t due until January 2022 – but you’ll need to file and receive your SA302 to make an application now.
5. Look for repeat business or long-term contracts
An uncertain income is the largest factor counting against mortgage applications from freelancers.
So if you're able to show evidence of long-term contracts from clients, regular sales or repeat business, this might go some way to allaying lenders’ concerns.
It’s worth providing as much evidence as possible that the clients are robust, above and beyond the documents the lender specifically requests.
6. Check your credit history
Aside from income, lenders will look at the credit history to find out how risky it would be to lend you money.
Before applying, check your credit report for errors and ensure it accurately reflects your financial dealings.
You also needs to do something to enhance your score – you can find out more within our help guide to enhancing your credit.
7. Build up a bigger deposit
The more income you’re borrowing for the purchase price of a home, the riskier your application.
The loan-to-value ratio (LTV) shows your loan like a percentage of the value. So, for instance, an LTV of 80% indicates that you’re borrowing 80% of the property value and have a 20% deposit.
If place more income into your deposit, or save for longer to construct it up, you may improve your chances of being accepted. Alternatively, you can purchase a less expensive property, so that you’re buying in a lower LTV.
8. Look for a manual underwriter
Some lenders use computer systems to underwrite their loans, meaning you need to stick to specific criteria to be accepted.
Others offer manual underwriting, in which a human being considers the application. Like a freelancer, this may give you the opportunity to make a case for yourself – for example, by explaining variations inside your income or even the strength of your clientele.
9. Seek out a professional lender
You shouldn’t rule out high-street lenders when seeking a home loan, especially as freelancing gets to be more common.
But it’s worth also considering specialist lenders, who may focus on self-employed people and be more willing to consider your application completely.
That said, avoid making an application that’s apt to be rejected. A declined credit application is going to be documented on your credit report and may make it harder to apply in future.