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17 Dec 2018

One in five freelancers consider quitting to get a mortgage

Our top tips for securing a home loan as a self-employed worker

Buying a home as a freelancer can be daunting, to the point where a fifth have considered changing their job to improve their odds of securing a mortgage.

That's according to a new survey by The Mortgage Lender, which also discovered that 73% of freelancers believe mortgage lenders might discriminate against them due to their employment.

Which? explains how freelancers can improve their chances of successfully applying for a mortgage.

Freelancers fear mortgage rejection

Freelancing has become increasingly popular in the UK, with ONS statistics from 2017 showing four million people were self-employed with no employees.

Yet for many freelancers, buying a house can seem like an impossible step.

And now, a new survey by The Mortgage Lender claims 21% of freelancers have reconsidered their employment situation due to concern 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 who had previously made an application, 45% said they had found it difficult to provide the documents the mortgage lender needed - and just under 3% reported being ultimately rejected.

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Why is it harder for freelancers to get 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 be able to repay the loan.

As a freelancer, you may seem like a riskier prospect to a lender than someone in full-time employment, even if you're earning more and have a successful history of winning clients.

In some cases, this may mean lenders are reluctant to approve a loan.

But don't despair - you still have options. Below, we set out our top tips for freelancers trying to secure a mortgage.

Tips for freelancers applying for a mortgage

1. Understand how your income is calculated

Lenders will need to assess your income to work out how much you can afford to repay. The approach they usewill depend on whether you're running 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 recent years - though they may choose the most recent, or the lowest, depending on your specific circumstances. If you charge a day rate, some lenders may be willing to calculate this out to a year's worth of income to assess your potential earnings.

If you run a business, you'll need to show at least two years worth of accounts, ideally with a consistent or increasing profit.

2. Use an accountant

It's vital to have a certified or chartered accountant prepare your books. Many lenders won't accept accounts that haven't been signed off by an accountant.

But keep in mind that accountants may seek to legally minimise your income for tax purposes, which could backfire when applying for a mortgage, so chat to your accountant early about your plans.

3. Avoid gaps in your contracts

Taking time off as and when you want is one of the benefits of working for yourself.

But lenders will want to see a consistent pattern of income - or if, you're a contractor, of employment - so try to minimise big gaps in your activity in the year before applying for a mortgage.

4. Complete three SA302 forms

The SA302 form provides evidence of your annual self-assessment tax calculations. Most lenders will expect 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 example, your tax return for 2017-18 isn't due until January 2019 - but you'll need to file and receive your SA302 to make an application now.

5. Seek out repeat business or long-term contracts

An uncertain income is the biggest factor counting against mortgage applications from freelancers.

So if you can show evidence of long-term contracts from clients, regular sales or repeat business, this may go some way to allaying lenders' concerns.

It's worth providing as much evidence as possible that your business is robust, above and beyond the documents the lender specifically requests.

6. Check your credit history

Aside from income, lenders will look at your credit history to determine how risky it would be to lend you money.

Before applying, check your credit report for errors and make sure it accurately reflects your financial dealings.

You should also take steps to boost your score - you can find out more in our guide to improving your credit.

7. Build up a bigger deposit

The more money you're borrowing towards the purchase price of a home, the riskier your application.

The loan-to-value ratio (LTV) shows your loan as a percentage of the purchase price. So, for example, an LTV of 80% indicates that you're borrowing 80% of the property value and have a 20% deposit.

If you can put more money into your deposit, or save for longer to build it up, you may improve your chances of being accepted. Alternatively, you can purchase a less expensive property, so that you're buying at a lower LTV.

8. Look for a manual underwriter

Some lenders use computer systems to underwrite their loans, meaning you need to adhere to specific criteria to be accepted.

Others offer manual underwriting, where a human being considers your application. As a freelancer, this may give you the chance to make a case for yourself - for example, by explaining variations in your income or the strength of your client base.

9. Seek out a specialist lender

You shouldn't rule out high street lenders when seeking a mortgage, especially as freelancing becomes more common.

But it's worth also considering specialist lenders, who may cater to self-employed people and be more willing to consider your application in its entirety.

That said, avoid making an application that's likely to be rejected. A declined credit application will be recorded on your credit history and may make it more difficult to apply in future.