Self-employed individuals have long lived in a world of uncertainty surrounding the prospect of home ownership. The “traditional” pathway to buying a house consists of applying for a mortgage loan and paying it back over time. You place a down payment on the house of your dreams while the mortgage lender fronts the rest. It’s costly, but for 99% of the population, it’s the only way home ownership is viable.
Most budding house buyers worry about their mortgage loan applications, though self-employed people seem to worry the most. When you ask these individuals why they worry so much, they typically come back with the same answer: it’s impossible to get a mortgage when you’re self-employed.
This viewpoint stems from a lot of myths and misconceptions surrounding a self-employed mortgage, so much so that a lot of self-employed people avoid applying because they assume they won’t get a loan. But is there truth to this, or is it all a gigantic myth?
Self-Employed Individuals Face Higher Mortgage Rejection Rates
The mortgage process begins in the same way for everyone: you gather your financial information and look online for a mortgage quote. This isn’t an official acceptance or rejection for a mortgage loan, but it helps you see how much you’ll need to borrow and what it will roughly cost you.
The next step is to contact real lenders and submit a mortgage application. This is where a lot of the conversation surrounding self-employed people and failing to get mortgages starts – and there is a sliver of truth to the claims.
While it’s not impossible for self-employed individuals to be accepted for a mortgage, they do face a higher rejection rate than full-time, contracted employees:
- 23% rejection rate for self-employed workers
- 12% rejection rate for salaried employees
Looking at those figures, you can deduce that, statistically, you are twice as likely to be rejected if you’re self-employed. Does that tell the whole story? No. For starters, there’s a lack of information surrounding statistics like these, mainly when it comes to income comparisons. It would be interesting to see the rejection rates amongst self-employed and salaried workers who earn roughly the same amount of money each year. This stat looks at everyone, meaning it could be slightly skewed.
Why Do Mortgage Lenders Reject Self-Employed Applicants?
Despite our doubts over the fairness of those statistics, you can’t deny that self-employed mortgage applications are being rejected more across the board. The reason behind this couldn’t be simpler: a self-employed person seems like a higher money risk than a salaried individual.
Why? Because if you accept a mortgage application from someone with a set annual salary, you have a relatively good idea of how much money they make each month. This means you can quickly run the calculations and see that they can afford the mortgage repayments with minimal fuss. Self-employed individuals don’t have set salaries; therefore, their wages are unconfirmed, and you have to hope that they can keep up the repayments.
For many lenders, that’s not worth the risk because missed payments add u,p and there’s a chance they could lose out on a lot of money.
Does This Mean Self-Employed People Can’t Get Mortgages?
No.
That’s the key thing to remember: self-employed people can get mortgage loans, and sometimes they can do this without any problems at all.
The only difference between a self-employed mortgage application and one from a salaried individual is that the former requires more evidence. Someone with a full-time salary can simply show their payslip or contract, proving they earn enough for the lender to be satisfied. A self-employed person will need to collect more financial documents to showcase their financial health.
This will normally include:
- A large backlog of invoices showing your last few years of work
- Any contracts confirming paid work for future or ongoing jobs
- Tax returns proving how much you make post-tax
The key thing here is that you really need to supply as much evidence as possible over as many years as you can. A self-employed individual who can only provide evidence over one year will be way more likely to be rejected than one with five years of hard evidence. It’s all about showing that you’re in a good financial position and have maintained a consistent (or improving) income over multiple years.
As well as gathering all of this evidence, you can improve your chances of getting a self-employed mortgage by doing the following:
- Offering a larger down payment on the house: Lenders love this, as it means they’re giving you less money. A smaller loan carries less risk, meaning you are more likely to be approved.
- Improving your credit score: Get a better credit score to show you’re a trustworthy borrower. Excellent credit scores mean you’re good at using your money and don’t miss any repayments. It also happens that improving your credit score involves a series of positive financial management tasks, like minimizing debt and setting up a budget.
There is absolutely no reason you can’t walk into a lender’s office and enjoy a swift application process if you’ve got plenty of evidence, an excellent credit score, and are willing to make a decent down payment.
Of course, the core thing to remember about all of this is that you need to make enough money to afford a mortgage. Anyone – even salaried individuals – will be rejected if they don’t earn enough because it’s too risky for the lender.
Summary: It Is Not Impossible To Obtain A Self-Employed Mortgage
In conclusion, there’s no evidence suggesting that self-employed individuals can’t get mortgage loans. Many will go through the application process and enjoy success, but many won’t, and that’s a similar story for salaried individuals as well.
The only truth to this myth is that self-employed people do statistically have a harder time getting mortgage loans, though that’s no reason to despair. You can easily get a loan if you earn enough money, have a good credit score, and can supply as much financial evidence as possible. Don’t join the thousands of self-employed people too scared to apply for a mortgage; go for it, there’s nothing in your way!
Photo by Jakub Żerdzicki on Unsplash
