I was disheartened to see the results of a broker survey in this article from 18th March 2021, relating to the difficulty of placing self-employed mortgage cases. There are a variety of factors that could be the cause of case rejections.
The pandemic was an undeniably tough period for the self-employed. They faced less financial support from government schemes than the employed. Their businesses were heavily impacted by lockdowns, restrictions, and Covid-19 guidance. Many had no idea what the next day would bring for them.
I wanted to touch upon both issues – the important information that brokers need to understand to submit for self-employed applicants, and how the ‘pandemic year’ of 2020 doesn’t have to be the dealbreaker.
When submitting applications, one big factor that can affect application success is business performance.
When reviewing accounts, underwriters will review the past performance of the business, assess its current state and growth potential when considering the application.
When the government announced it was putting the country into lockdown in 2020, businesses ground to a halt. Without question, this was going to heavily impact the financial results of any business. As brokers are aware, you require three years of business accounts to consider a self-employed applicant for a typical residential mortgage.
The impact of the 2020 accounting year will therefore remain an issue for applicants for a few years to come, depending on the impact on their business. For an applicant who was planning to purchase their home over the next two years, this can or will have devastating consequences on their application.
Not restricted to the self-employed, but across society, adverse credit is a major factor in rejected applications – this has been heightened by the pandemic. During 2020 for example, a higher majority of Brits were late on payments or went deep into or maxed out their overdrafts and/or credit cards.
In a lot of cases, this was necessary to simply survive the uncertainty.
Even discounting the pandemic effects, larger lenders – whose application process relies on technological applications and instant credit checks – will throw up an immediate red flag and, in a vast majority of the cases, reject an application with even the smallest blip on the applicant’s credit file.
One of the financial support packages during the pandemic for the self-employed came in the form of Self-Employment Income Support Scheme (SEISS) grants.
What you may not be aware of as brokers, is that accountants were actively encouraging small businesses to take the grants as a safety net. Many self-employed Brits did – in their tens of thousands – with many not having spent them. Even if they didn’t spend the grant, having applied for it and receiving the money, could or will have an immediate negative impact on their application with some lenders.
Whilst this is pandemic-specific, this can also relate to loans to the business from family or loved ones, or support grants of any nature.
One immediate solution is the specialist mortgage market. Specialist self-employed mortgage criteria differ from standard residential mortgages, allowing greater flexibility and less long-term accounting – if the applicant’s business is in growth and forecasting is strong.
For example, according to some mortgage criteria applicants require one to two years of trading accounts, which is useful for newly self-employed applicants. And this will apply whether they are remortgaging or a first-time buyer.
Every broker will be aware of specialist lenders. Typically smaller, often building societies, that operate very differently from high street brands.
But how do we take full advantage of the benefits of hands-on specialist lenders?
Tell the story
Some of the issues raised around business performance, adverse credit, and SEISS grants could be resolved with just a couple of sentences.
Smaller lenders offer a more holistic approach to applications – with the business development manager (BDM), broker, and underwriter working together on the case. We call this common-sense lending.
- If there is a small adverse on their credit file – tell lenders why. Explain the circumstances. Leave a note and tell the story.
- If there was a blip in the business performance for a month or two, explain why. Maybe it was down to illness or bereavement. Let the lender know. Leave a note and tell the story.
- Did your applicant take the SEISS grant? Why? Was it on the advice of their accountant? Did they use it? Was it necessary for the business? Leave a note and tell the story.
It may seem like this is common sense, but it is commonplace that there is back and forth which slows down the application. Lenders want to give the applicant a fair shot, but if they are in the dark and don’t have the foresight of potential flags on the application, they cannot make an instant decision.
Discounting the pandemic year
It would be a dream to completely discount the pandemic year from accounts when applying for a self-employed mortgage. Well, that dream has become a reality with some lenders.
There are caveats, however. The business must have been trading for a year before the 2020 lockdown and must be showing consistent growth and operating at least at pre-pandemic levels. This is a significant step in improving success for self-employed applicants.
Self-employed applications needn’t be hard
Returning to the title of this article, self-employed applications needn’t be hard. You just need to know where to look. Speak to mortgage clubs, your peers, and BDMs. Search for webinars offered by lenders for guidance too – you will realise help is there.