Loans for the Self-Employed: UK Lenders Need Proof of Income
It is no secret that the gig economy has given rise to a large number of self-employed contractors and sole traders who would rather be their own bosses than work for an established company. But it is worth noting that there may some entrepreneurs dissuaded from embarking on their own self-employment dreams for fear of certain financial consequences. For example, consider loans for the self-employed. UK lenders are not being as enthusiastic about working with them.
A good case in point is getting a mortgage. Obviously, new MMR rules implemented after the housing crash now require lenders to be more diligent in determining whether a loan applicant can truly afford to borrow or not. As such, they are more particular about the kinds of documents they will accept as proof of income.
Salaried employees must provide proof of sustainable income. Lenders will usually accept any combination of basic pay, overtime pay, commissions, bonuses and other regular income. Loan applicants are expected to furnish at least three monthly payslips, and more if they want overtime pay to be included. But what about the self-employed?
More Proof of Income Required
For right or wrong, loans for the self-employed in the UK are harder to come by â?? though not necessarily impossible. Approved income streams are similar in that lenders will recognise several different kinds of income as long as it is sustainable and verifiable. The question is one of actually verifying every source.
Self-employed contractors and sole traders have a variety of methods they use to track their income. For example, a sole trader may use an inexpensive software programme deployed on a mobile device or laptop computer to keep track of income and outflow. But lenders realise that numbers can easily be manipulated to provide a more positive picture than truly exists. To get around this, lenders may require an accountant's certificate covering at least a couple of yearsâ?? worth of income. For mortgages in excess of Â£500,000, applicants will have to furnish a longer record of income by way of their accountants.
Second Job Income
Anyone who is primarily self-employed but holds a second job with an established company is likely to find themselves better off in their search for loans for the self-employed. UK lenders are a bit more comfortable in these kinds of scenarios because loan applicants can furnish payslips from their secondary employment. That does not mitigate the need for an accountant's certificate, but lenders are likely to put less weight on that certificate with several months of payslips in hand.
Advice for Contractors and Sole Traders
Anyone thinking about embarking on a career as an independent contractor or sole trader needs to consider the financial ramifications of doing so. Any plans to eventually get a mortgage shouldn't hinder a person's desire to be self-employed, but it should be a motivation to keep meticulous records from the very first day of doing business.
Self-employed workers also should make a point of hiring accountants to help them keep track of finances. As much as a contractor may not want to pay the extra expense, doing so will benefit that person in the long run. Having an accountant verify sustainable income when applying for a mortgage goes a long way toward getting approval.
Loans for the self-employed in the UK are a little more difficult to come by due to a greater burden of proof. But if the entrepreneur does his or her homework and keeps good records, it is possible to borrow for a home or any other need.
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