Self-Employed Loans More Difficult to Get: Who Is to Blame?

Alex Parsons Alex Parsons | Secured Loan Expert

Self-employed people have been saying for years that they are at a disadvantage when it comes to getting a loan for a primary or secondary mortgage. Though experts have generally been sceptical of such claims, there is now some evidence suggesting it is true. So if a self-employed loan is more difficult to get, is there someone who should be blamed?

A recent survey commissioned by the Nottingham Building Society reveals that nearly one-in-eight self-employed individuals seeking first-time mortgages or remortgage products are rejected. That works out to about 12%. According to contributor Ben Lobel, the statistics clearly reveal underlying problems with the mortgage market review (MMR) rules as they apply to the self-employed.

Even more important is the realisation that Nottingham's study indicates the problem is not that self-employed people do not earn enough money to qualify. Some 48% of those who participated in the survey earn at least the same amount than they did in their previous jobs; 26% claim they earn more. So what's the problem?

The Official FCA Position

The Financial Conduct Authority published its Responsible Lending Review in the spring to make known how well the MMR process is working. In that report, they concluded that there is nothing preventing mortgage lenders from making loans to self-employed applicants based on MMR rules. The regulator went on to say that the volume of loans made to the self-employed has remained static. In other words, banks are not making fewer loans to self-employed applicants than they were prior to MMR.

If the FCA's position is correct, it tells us two things. First, the difficulty in obtaining a self-employed loan has always resulted in a rejection rate above 10%. Second, it indicates that the reason banks are turning away such large numbers of self-employed applicants is something other than income qualifications. What could that something be?

One possibility is the tendency of self-employed people to earn a living through volume rather than consistency. In other words, a contractor may take jobs from half-a-dozen or more employers in a single year where just one company employs a salaried worker. Working on volume may be disadvantageous in that it is harder to document. Lenders may be frightened away by this simply because of the nature of working this way.

Another possibility is the common misconception that self-employed people ?? particularly contractors and sole traders ?? do what they do because they are unable to keep a salaried position. Although this bias exists throughout many areas of financial services, the line of thinking behind it is completely untrue. The vast majority of individuals who are self-employed have chosen that road because they wanted to do it, not because they had no other choice.

Persistence Pays Off

There is no denying that getting a self-employed loan for a primary or secondary mortgage can be challenging. For a person who has applied and been rejected, the best remedy is to keep at it. Persistence generally pays off in the long run. And if a self-employed individual has tried every bank he or she can think of, there are other options out there.

For example, peer-to-peer (P2P) lending has proven to be a very valuable tool to the self-employed. P2P lenders don't have to follow stringent MMR rules, so they are easier to work with. More importantly, the whole concept of P2P was developed solely for the purpose of serving borrowers who, for whatever reason, were unable to do business with a bank. P2P has turned out to be a great option for self-employed loans.

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