Mortgages for the Self-Employed

Being self-employed should not hinder you in your mortgage requirements and is one of the main reasons why lenders created the self-certified mortgage.

The Self Certification Mortgage first came about as a direct result of a great number of self-employed people who were unable to obtain a mortgage through a conventional mortgage lender. The idea behind the true self cert mortgage was that rather than having to produce documented proof of regular monthly income either through three years of accounts or standard pay-slips, the true self cert mortgage would allow people to self declare their earnings. This process of self-certification of earnings seemed to be fairly straightforward and enabled the average self-employed person to invest in property. The higher interest rate and fees kept the mortgage lender happy and so it seemed a good solution throughout.

Quick Guide: Qualifying criteria for self-cert mortgages.

Your stated income:

Your stated income is the overriding piece of criteria used to qualify for self employed mortgage lending although the declared income still has to fit within the lenders lending multiple.

Period of Self-Employment:

The length of time you have been self employed is the second main ‘filter’ used by mortgage lenders that will determine which lenders are willing to lend.

Self-employed more than 3 years - If you have been self-employed for more than 3 years then all self-employed mortgage lenders would classify this as meeting their requirements.

Self-employed for 2 years - If you have been self-employed for 2 years the availability of lenders will decrease, leaving only a limited choice of mortgages.

Self-employed for less then 1 year – Mortgage companies will be generally restricted to a few select companies only.

Accountant Details:

Most lenders will require that you have an accountant. The reasoning behind this is to confirm with the accountant that you are in fact self-employed and some lenders may want confirmation of the amount of years you have been trading. If you do not have an accountant and complete your own tax returns then the lender will usually require some form of Inland Revenue notification referring to your business – again to prove that you are trading as a self employed person

Are There Any Drawbacks with the True Self Cert Mortgage?

Should you be worried about deciding to take out a true self-cert mortgage? Over the last year or so, it seems as though the true self-cert mortgage has rarely been out of the headlines. A couple of years ago these true self cert mortgages came under scrutiny as there was a suspicion that the borrowers were lying about the amount of money they actually earned in order to secure a larger mortgage. This led to a thorough investigation of self-cert mortgages by the Financial Services Authority and the way in which they were sold.

So, what was the result and how will this affect the future of the true self-cert mortgage?

The conclusion of the investigation by the Financial Services Authority was that although true self cert mortgage borrowers were no more likely to struggle in their mortgage repayments, they may be feeling tempted or even pressurised to incorrectly self declare their earnings.

Although at first glance this may seem a bit worrying, in fact the conditions of the true self-cert mortgage are aimed at reducing the risk of any exaggeration of earnings occurring.

These conditions include:

•Higher Interest Rates – The conditions of the true self-cert mortgage often include a higher interest rate than a conventional mortgage

•Larger Deposit – The deposit required for a true self-cert mortgage can be as high as 40%.

•Prosecution – It is in fact a criminal offence to knowingly provide any false information on your mortgage application form

The drawback with a true self-cert mortgage then may actually seem to be the temptation to lie on the application form. However a recent study suggests that the number of repossessions with a true self-cert mortgage is no higher than with a conventional mortgage. It would seem that despite the temptation the overwhelming majority of borrowers realise that the pitfalls associated with exaggerating their earnings and generally tell the truth.

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