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Can you get a mortgage with bad credit if you are self-employed?
It is possible to get a residential mortgage or a buy to let mortgage if you are self-employed and have experienced credit difficulties in the past.
Lenders all have their own criteria around adverse credit so it is important to find a lender that can consider your application based on your credit file.
When it comes to lending to self-employed applicants, lenders also have their own individual ways of assessing the applications.
For instance, for limited company directors, some lenders will assess your application based on the director’s salary and dividends received within the financial year.
Another lender may look at the director salary plus their share of the company net profit before or after corporation tax (depending on the lender).
This can make a significant difference in your maximum loan capacity if you have decided to retain some of your company profit.
A mortgage adviser would be able to get an understanding of your company financials to know which lenders may be suitable to you.
Bad credit can be many different things such as bankruptcies, individual voluntary arrangements, defaults, debt management plans, payday loans, arrears and more.
Your adviser would need to get a full understanding of the adverse credit that took place and why it happened.
With this information, along with full knowledge of your situation, they can look for a lender accordingly.
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Will every lender be available if you have bad credit and are self-employed?
Although almost every lender can consider a self-employed applicant (albeit, they underwrite them differently), they will not all consider people with adverse credit.
Some mortgage lenders insist on a clean credit file in order for them to be able to lend to them. This could mean no adverse data within the last 6 years.
There are other high street lenders that can be more flexible and consider applicants with minor adverse within the last 6 years.
There are also lenders that specialise in mortgages for people with adverse credit.
These lenders include companies like Precise Mortgages, Together Mortgages and Bluestone.
They can be very flexible regarding adverse data on an applicant’s credit file. They can also lend to self-employed applicants.
Specialist adverse lenders usually charge a premium for their products by way of an increased interest rate or arrangement fee.
Sometimes they even scale their products depending on the severity of the adverse data.
An experienced mortgage adviser would be able to get an idea of which mortgage products you qualified for, based on your situation and your credit file.
You should look for a mortgage adviser that is regulated by the Financial Conduct Authority with experience in credit impaired mortgages.
How does a lender’s credit scoring system work when assessing a self-employed mortgage?
When a lender credit scores your application, this means that their machine is analysing your full situation and credit report, before making an initial decision.
Lenders all have their own system which work in different ways. This means that what is acceptable to one lender may not be to another, if their system rejects your agreement in principle.
When the system credit scores your application, it will be looking at many different things.
Some of which are your deposit amount, your income, how the income is made up, your debt balances, monthly payments and overall credit conduct.
The system then scores you based on this information. Lenders rarely share the algorithms within their credit scoring systems.
With some lenders, if the agreement in principle is declined as a result of credit score, there is no appeal process and you would need to move to another lender.
However, not all lenders work like this and some would be willing to have a further look using a human underwriter, with the power to overturn an initial decision.
Some lenders do not credit score at all, meaning that they won’t rely on a computer to make a decision for them.
Babel still look at an applicant’s credit file in order to assess whether they are a good match, but without using a scoring system to determine if they qualify for a product or not.
Your mortgage adviser should be able to explore which lenders use a credit scoring system versus the ones that rely on human decisions.
How many years of self-employed accounts do I need to get a mortgage, if I have bad credit?
The amount of years accounts that you need as a self-employed applicant depends upon the lender.
Some lenders require as many as three years of accounts before they can consider an applicant for lending.
The most common amount of accounts needed is 2 years where a lender would take an average of the income, or potentially the latest years’ profits.
There are even lenders that can lend to a self-employed applicant with adverse credit, even if they only have one years’ accounts.
The lender would likely need to get an idea of what the applicant was doing before, and what the projected income is going forward to make sure that income is sustainable.
Your mortgage adviser would search for a lender based on your credit file and trading history.
How can I find out my credit rating and improve my score?
There are plenty of websites available for you to look at your credit history and get an idea of what your credit score is.
However, different credit reference agencies use a different scoring system, so it should only be used as a guide.
A good website to use is Check My File. It shows you 6 years’ worth of history for three major credit reference agencies which are Experian, Equifax and Transunion.
Check My File offer you a free trial for 30 days, so you can understand your credit history.
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Should you use a mortgage broker to get a bad credit mortgage if you’re self-employed?
It is recommended that you use a mortgage broker if you are self-employed with adverse credit.
The reason is, both self-employed mortgages and adverse credit mortgages are specialist areas. This means that not every lender will be willing to accept your application.
In order to save your time by avoiding the wrong lenders, it would be recommended to look for an experienced mortgage adviser who can fully understand your situation and search for a lender accordingly.
Most mortgage brokers will be willing to offer you a free consultation so you can understand your options.
Conclusion
It is certainly possible for an employed applicant to get a mortgage, even if they have had bad credit in the past.
Not all lenders offer mortgages for credit impaired applicants so it is important to find the correct lender based on your situation.
Self-employed mortgage lenders underwrite their application is in different ways. This means that there can be a large variation in maximum loan amounts depending on which lender you go to.
Some lenders work off applicant’s share of net profits rather than dividends received. If profits are being retained, this can make a large difference to lending capacity.
It is recommended that you find an experienced mortgage adviser to discuss your full financial situation along with details of your impaired credit.
Your mortgage adviser will want a copy of your credit file so they can see full details of any adverse credit that is showing.
With this detail, they can then search for a lender based on how your income is received and your credit conduct in the last 6 years.
Most mortgage advisers will be willing to give you a free consultation to explain to you what may be available.
If you would like I NEED ADVICE to match you with a mortgage broker that is both experienced and regulated, to tell you your options, please complete the contact form.
They are experienced, which can boost your chances of being approved.
