"Underwriting process for self-employed more involved"
“It is true that the underwriting process for a self-employed borrower is more involved than for an employee on PAYE,” according to Keith Barber, director of business development at the Family Building Society.
Barber looked at the difficulties faced by the self-employed when applying for a mortgage and revealed that the process is lengthier for those with more complex incomes.
Why do the self-employed face borrowing challenges?
The term self-employed covers a large range of different circumstances and set-ups, and self-employed people often have multiple and varied income sources which change from month-to-month let alone year-to-year.
The self-employed face stricter affordability checks from lenders as their income is less reliable than that of a fully employed person. As a result, a self-employed individual will often face enhanced underwriting, additional documents and scrutiny when seeking a mortgage.
On top of standard requirements, the additional documents a self-employed borrower will need include more than two years’ worth of accounts, SA302 forms or a tax year overview (from HMRC) for the past two or three years, evidence of upcoming contracts and evidence of dividend payments or retained profits.
Data from the London School of Economics (LSE) and the Centre for Economic Performance (CEP), showed that 39% of the self-employed reported having less work in August 2021.
This figure is up on both the levels of January 2021 (62%) and August 2020 (58%), however 72% attributed the cause of reduced work to COVID-19 and its subsequent restrictions.
Additionally, looking to the uptick in self-employed numbers, figures from the Office for National Statistics show that there are 4.8 million self-employed people in the UK, which makes up 15.1% of the workforce. This is up from 3.3 million self-employed in 2001.
“Inevitably, in seeking to help a would-be borrower we do have questions and these will vary from case to case because each one is unique,” Barber said.
He went on to add that the building society wants to understand the borrower’s situation and reassure them that it is looking for reasons to lend rather than to decline an application.
What is the solution?
“At the Family Building Society, we underwrite applications manually. This is because we have the expertise within our team to examine and understand the whole picture,” said Barber.
Barber went on to say that this approach allows the lender to look holistically at a self-employed applicant’s individual situation.
A manual approach assists self-employed borrowers in getting a mortgage - particularly in recent times as many needed to take out loans over the course of the pandemic to aid their financial situation, which in turn has now impacted their affordability.
Nearly three million self-employed individuals, or partners in partnerships, claimed one or more of the five self-employment income support scheme (SEISS) grants during the coronavirus pandemic.
Despite the grants, many lenders who take a manual approach to underwriting are choosing to ignore last year’s accounts, and assess the individual based on their current financial situation and their situation prior to the pandemic.
“We take into account business performance, business type, historical trading and future prospects,” Barber added.
He explained that this approach was particularly important for the building society during the various lockdowns when trading was very difficult.
The appeal of an offset mortgage is also evident to the self-employed, according to Barber. He said that building up a credit balance, for example, allows payment holidays to be taken or for borrowing back at the same rate.
In addition, money put aside for tax bills could be used to reduce monthly mortgage payments.
“All lenders should consider allowing the self-employed to make overpayments when they can afford to, which would help, as would pre-approved draw down facilities, without revisiting the underwriting criteria,” added Barber.
Barber went on to say that he hears many mortgage brokers stating that they feel, in certain cases, lenders’ criteria for self-employed borrowers is very complex and difficult to fathom.
“Innovation and flexibility are key, and many lenders need to take a fresh look at how they serve the self-employed,” he concluded.