Self Employed Bad Credit

Self Employed Bad Credit

Gary explains how the mortgage process works if you are self-employed with bad credit.

What are the main challenges self-employed individuals with bad credit face in securing a mortgage?

Two things really stand out here, and the first is misinformation. There’s a lot of information out there, but not all of it is good or accurate. So it’s really important that you speak to somebody who really knows the field and could guide you through it.

The second challenge is that some advisors out there don’t care. It sounds harsh to talk about our fellow advisors like that, but some of them really don’t. So not only is it important to find an advisor who knows this subject well, but also somebody who really cares.

Ultimately, it’s very easy to have a blip on your credit file – and how we deal with those blips could be really important.

How can self-employed individuals with bad credit improve their chances of getting a mortgage?

This sounds basic, but sometimes basic is a good thing. If you are behind on something, get those bills settled as soon as possible, and keep them settled. Stay within your limits – your overdraft limit and credit card limits – and pay your bills on time. That will give you the best chance of getting a mortgage.

What documentation do self-employed individuals with bad credit need when applying for a mortgage?

There’s nothing specifically because you have bad credit, but it’s always worth recapping exactly what you need. Typically it’s proof of ID – ideally your passport – and proof of address, which could be a utility bill data from the last three months or your driving licence, assuming it’s registered to your current address.

You will need personal bank statements and if you’re self-employed, often lenders ask for three months worth of business bank statements to show that the turnover you’ve declared is ongoing.

Depending on the type of self-employment, you may need to provide company accounts, personal tax returns or tax calculations with corresponding tax year overviews – or even all of those documents together.

Can self-employed individuals with bad credit get a mortgage without a large deposit?

The deposit you need will largely depend on what adverse information is recorded – how much it was for, when it started, when it ended and if it’s already settled. All of these things will have an impact on the amount of deposit that you need.

But it’s entirely possible that you could go as low as a 5% deposit. Or, depending on the information recorded, you may need up to a 30% deposit or more. Of course, your deposit won’t mean you automatically sidestep the lender’s general affordability calculations; you’ll still need to meet those.

What interest rates can self-employed individuals with bad credit expect to pay on a mortgage?

This is a question that comes up a lot. And as you might imagine, the answer changes almost daily. As we sit here today, on the 8th of August 2024, we could see market rates with larger deposits starting to sneak under the 4% barrier for the first time in a while. But there aren’t many, and you do tend to have a much, much bigger deposit for those kinds of rates.

Typically, you’ll be looking somewhere between 4% and 5%, but depending on the adverse information, you could be looking at 6% or 7% or beyond. In my experience that’s nearly always been the case, but it’s very much dependent on the day.

The recent base rate cut on 1 August took the base rate down to 5% so we are waiting for rates to go down – but the pace of that is difficult to see at the moment.

Whilst bad credit might mean you might pay more than on mainstream mortgages, ultimately it will still come back to the details of the adverse credit, how much it was, whether it’s settled and when. Those things will play a factor in the rate you get, and which lender is correct for your circumstances.

What role does a credit score play in getting a mortgage as a self-employed borrower with bad credit?

As you could imagine, it’s very important. One of the key things to do is get a copy of your credit file and look at what information is recorded.

Although the credit reference agencies do their best, they could only record the information provided to them by third parties. On rare occasions, things are reported incorrectly. That could mean you’re not necessarily getting the fairest deal for your circumstances and end up paying more than you need to.

The credit score and the background of that credit plays a really important role in your mortgage rate, whether that’s closer to mainstream rates or you need to pay extra for specialist style mortgages.

Do any mortgage lenders specialise in lending to self-employed individuals with bad credit?

They do, and it’s an area of the market that’s been growing over the last few years. We went through Covid in 2020/21, and we had the mini budget in 2022, which had significant impacts on people’s finances.

Since then, lenders have become more accepting that someone might have a blip, so adverse credit, self-employed or otherwise, is definitely a growing market.

Of course, the other thing we’ve seen over the last five years is real growth in the self-employed economy, from taxi drivers to delivery drivers, and a lot of these people are self-employed.

The lenders are becoming more flexible in what they will accept, including how long someone has been self-employed. Fundamentally though, the way they assess self-employed income hasn’t changed that dramatically.

if you’re a sole trader, for example, they will still lend to you based on the net profit that you declare to HMRC.

What steps can self-employed individuals with bad credit take if they have been declined for a mortgage?

Check your credit file, because ultimately anything that’s recorded inaccurately or is not quite right affects your chances. Correcting that information will tip the balance back in your favour.

If you are behind on any bills, get them up to date. Once they’re up to date, keep them maintained and, where you have limits such as on an overdraft or a credit card, stay within those prescribed limits.

Avoid taking out payday loans, as well. Lenders look at them unfavourably – they just don’t like short-term lending. More importantly, they see this as a sign you can’t manage your finances on a day-to-day basis – so how would you manage a mortgage payment on top every month?

How long does it take for self-employed individuals with bad credit to get a mortgage offer?

It’s similar to a standard mortgage, but ultimately, it depends on the lender. Lenders have different service level agreements and do things in their own time. Those times will vary depending on how busy they are, for example.

Typically we try to get you a mortgage offer within 10 working days. If we are working with a specialist lender, particularly with adverse credit, it’s not uncommon for them to ask for some insights into what happened and explanations on why a particular event came to pass. So it might take a little bit longer, but we always aim for 10 working days and that applies to everybody equally.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.