Self-certification Works – with Safeguards
By admin
Issued on behalf of Castle Court Consulting
Working patterns and income streams have changed dramatically over the past 20 years with fewer and fewer people working 9-5 and taking home a standard wage packet.
Increasingly, household income is made up of commissions, bonuses, overtime and investments. And with self-employment rising faster in the last five years than at any time since the late 1980s, mortgage providers had to do something to clear the muddied waters.
And they did, introducing ‘self-certification’ lending, whereby the applicant could declare their true income on application without having to prove this through pay slips or accounts.
Though this approach has attracted recent criticism, one industry expert says it is a good thing for certain borrowers – as long as they follow some simple guidelines.
Julia DeBattista, director of Cardiff-based Castle Court Mortgages, is used to dealing with a wide range of clients, many of whom have alternative forms of income.
“Obviously self-certification could be open to misuse as no evidence of income is being sought. And it has received some bad press lately as some mortgage advisors have allegedly encouraged their clients to inflate the amount of earnings in order to obtain a higher mortgage loan.
“Of course, inflating income does not benefit the client, as ultimately they will be taking on greater levels of debt than they can comfortably afford. Past experience has clearly shown that this can easily lead them down the slippery slope, starting with difficulty in meeting monthly payments, then going into arrears and an escalation of difficulties that can end in repossession.
“It should be remembered that once tainted with an adverse credit history, getting future credit is highly unlikely and, even if it is possible, will probably be extremely expensive.
“But most lenders have affordability and suitability checks in place, together with stringent underwriting processes for this type of mortgage. For example, a client employed as a waitress would unlikely to be earning £50,000 and this would probably be flagged as suspicious during the underwriting process.
“Because of the perceived additional risk on the lender’s behalf, it is likely that the rate or fees available will be higher and add expense to the real cost. So applicants should be asking themselves why they need to self-certify as they could be being charged a higher rate and/or higher fee for this type of deal.”
But there are many good reasons why people go down the self-certification route. Perhaps they are self-employed and unable to provide evidence of their true level of earnings due to the tax-efficient way their accounts are prepared.
Or, perhaps the latest sets of accounts are not yet prepared and the most recent information is now out of date. Or, as an employed person, they may be receiving a number of different irregular payments or large annual bonuses, which again may not be easy to provide evidence for but if there is a track record of receiving payments it can help.
“Whatever the reason, if applicants do decide to go down the self-certification route they should never sign a blank application form. The same rules apply to them as those people applying for traditional mortgage; always check that the information that may have been completed on their behalf is true and correct.
“And we’re not just talking about the honesty and integrity of mortgage brokers and people further down the line but about human error. Often the documentation is rushed through and assumed to be correct. But assumption is the foundation of many an error or misjudgement.
“And for self-certification applicants, obtaining independent advice from a trustworthy and fully qualified source is crucial in order to ensure you are getting the best product on the market which suits your circumstances both now and in the future.
“This is a specialist arrangement and a large number of our applicants and clients benefit from our diligence in highlighting the shortfalls when arranging what is for most of them the largest personal debt in their life.”
Panel 1:
• Fast Track v Self-Certification?
o Many lenders will be flexible over what documents are to be provided with a mortgage application.
o If the loan:value ratio (i.e. the amount of mortgage loaned in relation to the value of the property) is low and the applicants obtain a favourable credit score, then no further proof of income may be requested.
o This means a more streamlined sales and underwriting process with applications going through much quicker than normal.
o Some lenders market these types of loans as ‘self-certification’, but will reserve the right to request further information at underwriting stage.
Panel 2:
• Dos and don’ts.
o Do seek independent advice from a reputable mortgage advisor who has the appropriate qualifications and is authorised by the Financial Services Authority.
o Do ask yourself why you need to self-certify your income.
o Do ensure that the information you provide the mortgage lender and/or the mortgage advisor is true and correct.
o Don’t ever sign a blank application from. Ensure any information completed on your behalf is true and correct.
o Don’t be tempted to inflate your income figures, even if you know you are not going to be asked to provide proof of earnings. Providing false information is fraud which could lead to prosecution. You may also be borrowing more than you can afford, which could lead to mortgage arrears and an impaired credit record in the future.
