The past couple of weeks have seen a lot of discussion, within the mortgage industry, about the future ability of the self-employed to successfully apply for The excerpt below is taken from a trade publication, Mortgage Solutions (05/06/2020):
Lloyds Banking Group has highlighted that self-employed borrowers are likely to need more help from brokers as more emphasis is put on income verification and other underwriting.
The lender noted that the fallout from the Covid-19 effects meant lenders would be looking to get a much deeper understanding of individual circumstances.
Speaking on Mortgage Solutions Television, Esther Dijkstra, director of strategic partnerships at Lloyds Banking Group said elements of self-employed income would be referred to underwriters.
“That’s where we also need the brokers to support us in providing that information so we can see how it has impacted those self-employed borrowers,” she said.
“It’s the long-term history of their business, funds to meet their fixed commitments like rent and utilities, how likely are they going to return to normal profitability.
“So it’s really crucial that intermediaries support us on that journey to make sure we can support those customers as well.”
Over the past few years lenders have greatly-relaxed their respective criteria for those individuals who are self- employed. Traditionally, one of the downsides of self-employment was the perceived difficulty involved in securing finance for a property purchase. However, many lenders modernised their underwriting, and the traditional requirement to show three years’ worth of accounts changed, in many cases, to two years’ accounts. Some lenders even became prepared to use the latest year’s profit, without the need to take an average over two or three years, this proved to be a massive boost to many borrowers. In addition, where individuals were, technically, employed by their own Ltd Company, lenders began to look at retained profits and dividend income, not just the salary drawn from the company. The latter method had always limited such individuals’ ability to raise their desired level of finance.
One of the many questions to arise, as a result of the Coronavirus ‘lockdown’, is ‘will self-employed people still be able to easily secure mortgages?’. Clearly, with a massive downturn in economic activity and with further troubles predicted, lenders were always going to tighten-up their underwriting criteria. Every lender now asks questions about the impact of the lockdown on the applicant’s income and their job security. However, it does seem that applications from self-employed individuals are being made subject to the greatest level of scrutiny. Earnings for the self-employed can be precarious at the best of times, but lenders are now looking for proof that previous years’ profits can realistically be achieved in the immediate post-lockdown environment.
Some lenders are insisting on full-underwriting for applications from the self-employed. However, this should not necessarily be viewed negatively. In these cases, the underwriter wants to ‘build a picture’ of the applicant. Some underwriters will call us directly to discuss the case and others will correspond via email. Either way, it gives us an opportunity to explain the applicant’s circumstances and to make sure that the underwriter understands exactly how the applicant makes their money. We’ve been asked about how applicants get business, if their work is subject to social-distancing measures and if they’ve been able to continue working throughout lockdown. The applicant’s most recent bank statement is usually requested, along with some pre-lockdown statements, so that they can be compared. Our experience of this approach has so far been highly-satisfactory. It would be naïve to expect lenders to continue operating as they were in February or March, but we certainly feel that there is a desire to continue lending to the self-employed, where it is justifiable. At times such as these, it is even more important that lenders are seen to conduct due diligence and self-employed applicants should be prepared to provide much more documentary evidence of their income. However, the point is that the self-employed certainly can secure mortgage offers, as long as they have resumed working at their usual level.
As the vast majority of lenders will insist on a deeper-level of underwriting, it is important that self-employed applicants work closely with brokers to explain their situation and to provide any documentation that might support their application. This is another situation where a good broker will show their true-worth, acting as a bridge between client and underwriter, helping the latter to understand the business of the former.
At Clifford Davis we’ve secured mortgage offers for the self-employed throughout the period of lockdown. If you have any questions about your own ability to make a successful application for any type of property finance, contact us to discuss your circumstances and we will be happy to guide you
