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Getting a mortgage as a freelancer is certainly possible, but mortgage providers are a lot more hesitant following the credit crunch in 2007.
When applying, you will have to provide two years of accounts from a registered accountant and also show a track record of regular work over those two years.
Like any mortgage, you must have a good credit history, but you will also be expected to have a healthy deposit ready of at least 20%.
It is now your job to prove your income and that you will be in a good position to make repayments. A lender will most likely ask for two years of accounts from a registered or chartered accountant. Although not all providers will ask for an accountant, it is highly recommended to use an accountant to ensure all your papers are correct and up to date. Lenders will be unimpressed if you show accounts that are not up to date.
That said, some lenders may be willing to judge you on the next step if you are unable to show two years of accounts.
Giving evidence of regular work is necessary to show you will be able to make repayments to your mortgage. A good work history gives lenders an indication that you will have regular work in the future.
Equally, it is just as good to show you have work lined up in the future as evidence of your workload. As unlikely as it may seem, mortgage providers don’t want you to get into debt, and so the application process ensures this won’t happen.
While regular mortgages will ask for a deposit as low as 5-10%, freelancers and contractors are asked to put down at least 20% on most occasions. For example, a normal mortgage would ask for a £10,000 deposit for a £100,000 property, while a freelancer would have to save at least £20,000 before being accepted.
Saving this amount may seem daunting at first, but there are plenty of tips and tricks to help you save more efficiently while still enjoying life. Take a look at our guide on making small lifestyle changes to save for your first deposit.
If you’re a sole trader, you will most likely have to complete a self-assessment tax return, known as an SA302 form. This will most likely be requested by the mortgage provider as they will look at how much income you have declared to the tax man.
Your accountant will be able to acquire a form for you. Alternatively, forms can also be printed from the HMRC website, or call 0300 2003300 to request a copy. Forms are usually delivered within 14 days.
Mortgage providers will look further into a freelancer’s credit history than a regular mortgage enquiry. Sometimes your credit history may simply be out of your control, but there are some great ways to improve your score right now.
The quickest and easiest way to improve your credit score is to get on the electoral register. If you’re not registered to vote, it will be a lot harder to get any form of new credit. Register to vote online or complete a form by post.
Crucially, make sure you don’t apply for any more credit until you sort out any issues with your credit score. If your credit score isn’t looking too healthy, you will likely be declined by most providers, and these applications won’t look favourable in your history. At the same time, cancel any unused credit cards to minimise the risk of fraud if they are stolen.
There are a lot of things you can do in the long term to fix your credit history. Primarily, paying bills on time when you can will show you are a sensible borrower. If you have a bad credit history, prepaid credit cards and credit-building credit cards might be for you. Prepaid cards work like debit and credit cards, the only difference being that you have to pre-load money before you can spend. Most of these cards come without an overdraft, meaning you are unlikely to overspend. Prepaid cards cost a monthly fee of around £4.00-£5.00. Paying this monthly fee on time over 12 months will be passed on to your credit score and will look favourably as a year of successful repayments.
Credit-building credit cards work exactly the same way as a regular credit card, but be warned that most charge interest fees of up to 30% per annum. It is best to make a small monthly purchase on this card which can be repaid easily. Note, these cards should not be used the same as regular credit cards because it will be a lot harder to repay larger sums with added interest fees.
Keep a positive attitude in the run up to your application and ensure all your accounts and paperwork are in check before you make your application. It may take longer to prove you can make repayments as a freelancer, or even to save for the deposit, but keep with it.
If you are unsure about certain aspects or would like more advice, talk to a mortgage broker who will be able to guide you in the right path and give you information specific to your case. More and more people are becoming self-employed, and mortgage providers are slowly adapting to that.
Hiring an accountant is the best approach to getting your mortgage, and let them know your situation. Over the duration of your deposit saving period, your accountant will be able to get all your paperwork and accounts in check.