The self-employed face enhanced underwriting, additional documents and extreme scrutiny
Enhanced underwriting, additional documents and extreme scrutiny have caused even the best self-employed cases to be questioned in recent months, according to Sarah Tucker, founder of The Mortgage Mum.
“Now more than ever we, as brokers, need to have exceptional knowledge and confidence in our roles, and be willing to challenge decisions that do not feel right to us,” she said.
The self-employed face stricter affordability checks from lenders as their income is less reliable than that of a fully employed person.
“An example of this is when lenders are questioning income on cases based on company bank statements spanning the last three months,” Tucker said.
She went on to add that a lot of her self-employed clients have seasonal work, and their annual income is not consistent, but it is reliable. Tucker explained that sometimes the last three months do not offer the reflection needed without explanation and challenge, and without a true picture being painted.
According to a poll conducted by the forum Cherry, 24% of brokers said mortgages for self-employed and contractor clients were the hardest to place, followed by clients with adverse credit.
Read more: Lender affordability criteria takes a hit
A self-employed borrower will need 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.
“The additional documents needed mean these cases take much longer than an employed case to offer, due to the additional underwriting questions. This can affect our purchases if the client is not prepared,” Tucker added.
How has the COVID landscape impacted the self-employed?
A lender’s self-employed mortgage affordability check works broadly the same way as it does for a salaried employee, although a borrower would have to provide evidence of how their earnings have been raised.
“We are seeing lenders ignore the ‘COVID year of income’ and take an average of the year’s income either side, which makes a huge difference for some,” Tucker said.
“Others are allowing the SEISS grants to be used as income, which, again, is a huge positive for some.”
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.
The SEISS grants are taxable income. Most people will need to report the first three SEISS grants, if claimed, on their 2020/21 self-assessment tax return. More than 2.7 million customers claimed at least one SEISS payment up to April 05, 2021, according to HM Revenue & Customs.
“Ultimately, we know lenders want to see businesses are safe, healthy and ‘out of the woods’ but they do need to recognise the journey of each client and their business to fairly do this,” Tucker said.
The difficulty in proving this is that there are many uncertainties currently facing the economy within the UK, which in turn has an impact on the self-employed. The fallout of the pandemic and its impact has been combined with the situation in Ukraine, meaning many self-employed individuals are having a hard time financially.
However, Tucker outlined that with lenders currently choosing to overlook some of their affordability criteria, she believes the self-employed do have a chance in getting the mortgage they want – as long as brokers play their part.
Tucker concluded: “Hopefully brokers and lenders can continue to work together to get the best possible outcome for all involved!”