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In this guide we’ll look at exactly how being self-employed and having bad credit can impact your chances of getting a mortgage, the types of lenders who might be willing to offer you a loan, and what you can expect in terms of deposit requirements and interest rates.
Yes, it’s certainly not impossible, although that doesn’t mean it will be easy. Each element in itself adds a layer of complexity to any mortgage application, so when you have both to contend with at once, it’s definitely going to limit your options.
While you may feel anxious about the process, or unsure of even how to begin, the important thing is to stay calm and positive and, crucially, get the right broker support. Mortgages are complex financial products and being self-employed and having bad credit make them even more complicated, so no one expects you to be able to do all of the research by yourself.
Every mortgage lender makes their decisions based on risk. Every factor they consider is in the context of one question - ‘will this person be able to pay this money back?’ When they’re looking at things like your age, employment status, income and other debts, it’s always with a view to evaluating how financially secure you are and how likely they are to get their money back.
Working for yourself is typically a riskier way to make a living than being employed, as your income is less secure and can fluctuate from week to week and month to month. As an employee you not only have a predictable annual salary, but you also have the back-up of things like sick pay if you are ill for any length of time. As a freelancer, you rely only on yourself and if you can’t work for any reason, your income may stop completely.
When we come back to the idea of risk, we can see why being self-employed might make it harder to get a mortgage. Lenders like predictable, reliable income, and freelancing doesn’t lend itself naturally to this. That’s why when you’re applying for a mortgage as a self-employed person, lenders will ask you to provide a lot more of your income history, to get a sense of how stable it has been over time.
The more evidence of reliable income you are able to provide as a freelancer the better, especially if you're dealing with the double issue of also having bad credit. Keep in mind all the time that a lender wants to be reassured, so as well as providing evidence of previous income, it could be useful to show them work that you already have in place for the future. Any agreed contracts that are in place that show that work is going well could come in handy.
Typically lenders will want to see three year’s worth of income evidence for a self-employed mortgage. This could be self-employed accounts if you have them, but if you don’t produce accounts and do your own self-assessment tax returns then it would be copies of your SA302 tax calculation. You can download copies of these from the government website by logging in to your self-assessment portal.
If you don’t have three years of accounts or tax records because you’ve become self-employed more recently than this, this is going to make it harder for you to get a mortgage on top of the bad credit. That’s not to say it’s impossible, as there are lenders who are sympathetic to newly self-employed people, it will just limit your options further. It will help your case if you are freelancing in an industry that you used to be employed in and so can demonstrate relevant skills and experience. For example, if you’ve worked in IT for ten years and have become a freelance IT consultant, you will be seen as a safer bet than if you’ve given up IT to launch yourself as a newly qualified sport masseuse.
Many people assume that lenders simply look at a credit score, and that a score below a certain level will be an automatic no on a mortgage, but that’s not how mortgages work in the UK. Although you may see a score when you log in to your own credit reports, these are really for your benefit, to give you an easy overview of your creditworthiness and to allow you to easily track improvements. Lenders won’t see those scores in the same way - they will usually look at the full credit report and use their own scoring system and attitude to risk to assess your application.
Although it’s true that there will be many lenders who do automatically decline mortgage applications because of certain credit issues, there are plenty of more specialist lenders who will take each application on its own merits, and look more carefully at the context of the credit issue. They may also give you the opportunity to explain why it occurred and to tell them why you think it won’t happen again.
Generally lenders will be assessing any bad credit on several different criteria:
This is a difficult one to answer as so much depends on the specifics of your circumstances. It’s fair to say that generally speaking, lenders do prefer you to have a higher deposit if there is a higher level of risk is your application, so if you’re applying for a mortgage as a freelancer and have bad credit, it’s not unreasonable to expect that many lenders might set lower maximum loan-to-values.
Having said that, if you’re looking for a bad credit self-employed mortgage then you may well already be going down the road of a specialist bad credit lender, and they can be more flexible about creating a mortgage to suit you. The bigger a deposit you can save the better, but if you have a low deposit then there could still be a mortgage for you.
Yes, this is very likely. With not one but two risk factors to mitigate, lenders will very likely offer you a higher interest rate than if you were in regular employment and had a perfect credit score. A higher interest rate will mean higher monthly repayments, so it's important to be realistic about what you can afford and to make sure you feel confident about your ability to commit to the mortgage on a self-employed income.
Keep in mind that you probably won't have to accept premium rates forever. Although you may initially want to tie into a fixed rate period - probably 2-3 years, once you reach the end of this you’ll have the option to remortgage to another deal. By this point you’ll have a longer self-employment history, your credit ma have improved and you’ll have built up more equity in your home, so you should be able to access more competitive rates.
This depends on your circumstances and the type of credit issues you’ve had in the past. Although a guarantor mortgage can be useful if you really can’t get a mortgage on your own, they don’t come with risks. Whoever you choose as your guarantor will normally need to be a homeowner themselves, as the mortgage will be secured against their property. This means that if you default on your mortgage, their home could be at risk as well as yours, so it’s not something to be entered into lightly.
Yes, it’s definitely worth finding a broker who specialises in more complex mortgages to help guide you through your application. Ideally you want to work with someone who has experience securing self-employed bad credit mortgages, so you can be sure they have a thorough understanding of your situation.
Be honest with them from the start about your credit issues - it’s only with a complete picture that they will be able to find the right lender for you. If you try to cover up your bad credit, you risk having it come to light further down the line and having your mortgage declined, which can impact your credit score even further.
A broker can also talk you through deposit requirements, what documentation you’ll need to support your application and advise you on when a more niche mortgage option such as a guarantor mortgage might be a good idea. Most importantly perhaps, they will do all the work of researching and comparing mortgages, finding you the best rates and the best terms, so that you don’t end up paying over the odds on your loan. EVen seemingly small differences in rates can have a big impact on the lifetime cost of a mortgage so it’s worth shopping around for the very best deal you can find.
Getting a mortgage if you’re self-employed and have bad credit certainly won’t be a simple process, but with the right support it may be possible. Talk to a broker today to find out how you can make your dreams of homeownership come true.
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