More than half of the people surveyed by Together believed that their chances of successfully applying for a home loan were slim due to their employment status (55 per cent) or irregular income (35 per cent).
These fears are backed by industry statistics, with findings by The Mortgage Lender indicating that self-employed individuals were twice as likely to be rejected for mortgage financing compared to employed workers.
The difficulties that self-employed borrowers are faced with are due to outdated processes and restrictions placed on them by traditional financial institutions. In fact, the application procedure for freelancers and individual entrepreneurs is deliberately designed to be more difficult, with some lenders requiring two or more years’ worth of firm trading records from independent workers, in comparison to the three months’ worth of pay slips that are typically requested from employees of companies.
Gig workers are at a disadvantage as well, due to their ‘unstructured’ jobs and varying levels of income. There is a higher perceived risk associated with these groups, and traditional lenders struggle to utilise their go-to creditworthiness checks to assess the self-employed, as data from credit bureaus or a selection of payslips may not hold enough information to grant application approval.
How can the self-employed access mortgage financing?
A specific type of employment contract should not be a reliable indicator of creditworthiness. Instead, up-to-date bank account data that highlights transactions and income over a period of time, and a candidate’s financial standing should be utilised to accurately assess this customer segment.
These checks can be easily performed through the use of Open Banking.
Open Banking is the secure sharing of financial information, transactions and payment history, directly from an individual’s bank account with a third party service provider. This technology allows lenders to tap into vital customer financial data, using secure APIs, and gather all the necessary insights to make a decision on an application. This is a highly digitised process, removing the need for manual documentation and the collection of payslips, bypassing needless repeated requests for additional information from credit bureaus.
Putting data to use
The process of extracting financial data via Open Banking is very quick and enables lenders to perform creditworthiness assessments in less time. With additional tools, some of the processing can even be automated and data can be categorised. These AI instruments can analyse the information gathered to flag inconsistencies and risky financial behaviour, such as gambling.
In addition to making the application process easier and faster, Open Banking also enables lenders to utilise alternative data, giving more financing opportunities to thin-file self-employed individuals. For example, the data gathered can include regular payments to utility and insurance companies to showcase reliability.
This is beneficial for the self-employed as lenders can more easily gather a more nuanced and complete report on the borrower, instead of relying on traditional data sources which often do not hold an updated client profile.
Open Banking provides an array of opportunities for underserved members of society. It certainly should not be overlooked by lenders wanting to implement modern methods and safer lending practices.
