Changes in the way lenders underwrite cases for self-employed means they may now decline applications they might have accepted pre-pandemic. So how might Covid affect your next mortgage application - and what can you do about it? Sharon Duckworth explains.
You can’t blame mortgage lenders for getting jittery as the pandemic first bit in spring 2020. As a result, they changed their lending criteria again, and again and again. At one point, things were moving so fast it was virtually impossible to keep up. In one 48 hours period last spring, we saw 500 criteria changes spread across a dozen or so lenders in just 48 hours.
Fortunately, things calmed down for most mortgage applicants. Criteria are generally stricter than they were before the first lockdown, although not massively so. But there’s one category of mortgage seeker who can feel very much excluded from that improving picture: the self-employed.
Why were mortgage applications by the self-employed so severely affected?
Last April, self-employed workers’ earning dropped by 30%. But unlike other parts of the economy, many self-employed workers didn’t get the sort of furlough help offered to those in employment. SEISS, the Self-Employment Income Support Scheme had supported an impressive 2.6 million self-employed workers by last summer, but around 1.2 million did not receive help (and some counts put the figure at closer to double that). They fell between the cracks, perhaps because they were new startups who hadn’t yet filed a tax return or because they didn’t receive most of their income from formal self-employment (instead receiving dividends as company directors).
For mortgage lenders, self-employment suddenly presented a complex, muddy and almost certainly riskier proposition than it had before the pandemic, and that led lenders to make life harder for self-employed applicants.
How did mortgage applications for the self employed change?
All lenders took their own view on what criteria to tweak and tighten, but amongst the changes were:
SEISS: Some (although certainly not all) lenders took the simple and fairly draconian view that if you’d received money from SEISS then your application wouldn’t be accepted.
Investigation: Some lenders announced they would scrutinise the businesses of applicants to test their sustainability and profit. Precisely what that involved wasn’t always entirely clear, but it certainly meant more gathering of paperwork and more delay in having your application reviewed.
LTV: The maximum loan to value many lenders were willing to offer to the self-employed reduced dramatically. Even as recently as January, Santander announced its LTV would be 60% for self-employed applicants. On a £200,000 home, for example, that would mean a £120,000 loan at best.
How to improve your mortgage application chances if you’re self employed
Given this rather bleak picture, how on earth is a self-employed person supposed to find a mortgage right now?
Find the friends: Despite the generally tighter criteria, not every lender has pulled up the drawbridge. You may not find as many lenders wanting to lend right now, but there are still some out there who will look on your application more sympathetically than others.
Lower your LTV: Given the climate, there may not be too many mortgage seekers who can afford to boost their deposit, but the more you can lower your LTV the greater your chances of acceptance.
Do your prep: Expect considerably greater scrutiny than just the last three months’ statements. Pull your accounts together for at least the last couple of years. Make sure your invoices and/or contracts are available to view at short notice. It’ll help speed up your application.
Get help: In an extremely picky market it’s really important not to take a ‘hit and hope’ approach to mortgage applications. Each unsuccessful application you make will affect the next, making each successive application more of an uphill struggle. Take a more targeted approach by zeroing in on the lender most likely to lend to you.
To find out who that is, talk to us.