A guide to self-employed mortgages with two years’ accounts
If you’re self-employed, you probably think that getting a mortgage is a nightmare. Will a lender approve your mortgage if you don’t have a standard payslip? How will they work out what you can afford to borrow from an SA302 or post-tax accounts?
The good news? You can stop worrying. The lenders we use have tried-and-tested specialist lending criteria. So, yes: you absolutely can get a mortgage.
It’s important to note that self-employed mortgages are slightly more paperwork-intensive than those for PAYE employees. But, the important thing is, having two years of accounts is often enough to get your foot in the door.
From there, it’s about helping an underwriter understand your true mortgage affordability. But what can you do if you can’t access an underwriter directly? That’s where we come in.
Here’s everything you need to know, translated from “lender jargon” into plain English.
1. The big question: can I get a mortgage with only two years’ accounts?
In a word: Yes!
To fit their self-employed criteria, most traditional “High Street” lenders (like Barclays, Lloyds, HSBC) prefer to see two to three years’ trading history. In contrast, specialist borrowers can be more lenient.
High Street lenders’ underwriters want self-employed borrowers to provide evidence of a long-term track record. They want verification of your status as a self-employed business owner and that your income is steady over that period. Together, these factors help them feel safer about lending you money.
But that’s relying on traditional criteria. If you only have two years’ accounts, you still have options.
A traditional lender might reject you outright without fully understanding your income. But there are specialist lenders who design mortgages specifically for independent professionals like you. Their criteria are more flexible, and underwriters look at your business potential.
To our lenders, your circumstances are more than a box-ticking exercise. Many underwrite manually to see your true borrowing potential.
2. Why is it harder for me than for an employee?
When a traditional PAYE employee applies for a mortgage, they provide payslips as evidence of income. These demonstrate a guaranteed amount of money arriving on the same day every month. And one thing that lenders’ risk departments love is certainty.
When you’re self-employed, your income can fluctuate. If you’re not a contractor on a fixed term contract, you might have a great month followed by a quiet one. Lenders view this fluctuation as “risk.”
To approve your application, underwriters need evidence that your business is stable. If you show continuity, you should be able to afford the monthly mortgage repayments as well as any permanent employee. That’s how risk departments view income.
3. The paperwork: what specific evidence do I need?
You can’t just tell the bank what you earn as you used to with self-cert mortgages. Today, you have to prove your income using official tax documents.
This might seem a counterintuitive move to some. What if you’ve only registered enough income to qualify for Stamp, but actually earned much more?
You may think you’re being smart using that strategy to save on tax and NICs. But it won’t cut it for a mortgage. A lender will only consider your declared income.
So, if you do have two years of accounts, you’ll have to supplement your application with:
- Your Accounts: many lenders will only use accounts signed off by a qualified accountant. They trust figures signed off by a professional much more than they would figures you prepared yourself on a spreadsheet.
- Your SA302 (Tax Calculation): this HMRC document summarises exactly what income you’ve reported for tax purposes. Visit the government’s site for more information about getting your SA302
- Tax Year Overview: this is another HMRC document that lenders like to see. Your TYO proves that you’ve actually paid the tax on your income.
Note: You can download your SA302 and Tax Year Overview directly from your HMRC online account.
4. How much can I borrow?
How much you can borrow will also depend on your payment structure. In turn, a lender’s policy towards certain payment structures can also have a bearing.
That’s because there’s no specific rule that informs lenders how to approach self-employed borrowing. Each lender develops their own attitude to risk (within FCA guidelines). It’s this outlook that then informs their lending criteria.
This is the part that confuses (and ‘infuriates’) most self-employed borrowers. How a lender calculates your “income”, thus your mortgage affordability, can depend on the legal structure of your business.
Here’s a very brief overview of the most popular payment structures held by our customers. There’s a link beneath each overview to take you to more in-depth guides for each type.
If you are a sole trader/freelancer
Lenders will use your Net Profit (the money left over after business expenses) as the basis of their affordability calculations. This they’ll get from signed-off accounts and/or SA302 tax calculations.
How they calculate it:
- Underwriters will usually take the average of your net profit over the last two years.
- Manual underwriting will help, especially if you can:
- Prove history within your current industry, or
- Healthy projections for the future
For further information, read our guide: Sole trader mortgages from the experts.
If you are a limited company director
Lenders’ affordability calculations usually look at a combination of directors’ Salary + Dividends. This will exclude any profit you’ve left in the company as profit:
- The trap: As a director, you might pay yourself a low salary and leave money in the business to be tax-efficient. Some lenders won’t include the money left in the business, limiting how much you can borrow.
- The solution: Specialist lenders may look at your share of the Net Profit, instead. Incorporating your profits as well often allows you to borrow much more.
For further information, read our guide: Mortgages for company directors
If you are a Contractor
In general, lenders use contractors’ Day Rates to work out how much they can borrow. This method is called ‘contract-based underwriting’, and was once the de facto method for Ltd Co. contractors.
However, in recent years, many Ltd Co. contractors have turned to umbrella companies for contracts ‘inside IR35’. Yet others have gone back to PAYE employment.
How they calculate it:
If you’re a limited company contractor, the standard affordability calculation is:
- Your day rate x 5 (days a week), and then x 46 or 48 (weeks a year)
This gives them an “annual projected income” figure to which they can add their multiplier.
The problem is that these criteria are not applied uniformly across lenders. Some will use contract-based underwriting for umbrella contractors. Others will treat Ltd Co. contractors as self-employed. Yet others still employ day-rate calculations, no matter what type of contractor you are.
In the spirit of things, these two guides will help you narrow your expectations, depending on your contractor payment structure:
But, no matter what type of contractor you are, you’re unlikely to find help in-branch or via call centres. Contract income is highly specialised, and lenders use specialist underwriting teams to handle such applications.
It’s rare for borrowers to have access to specialist underwriting teams. That’s because, even though they deal with niche borrowers, they still need a specialist broker to help them interpret contract income. That’s where we come in.
No matter what type of contractor you are, you’re much better off going through a broker like us from the outset. We can interpret your income to give you access to much higher borrowing than you’d access going it alone.
5. Other factors to consider when working out how much you can borrow
Your two years’ accounts in isolation won’t give a lender a full picture of your borrowing potential. They’ll want to build up a complete borrower profile before deciding how much you can borrow. This will include:
How much you’ve saved for your deposit:
The more money you can put down up front, the better. That’s because a larger deposit makes you less of a risk to the mortgage provider for two reasons:
- It shows that you’re serious to the point that you’ve had income to set aside over the last two years
- The property you want to buy will have less chance of falling into negative equity; if, for whatever reason, you can’t meet your repayments, your lender will want to ensure that they can recoup the money they lent you through the sale of your property; greater equity = lower risk!
Your Credit Score
Your credit score is hugely important to lenders. They want to see that you have a history of paying your bills on time. An unblemished history will give them the confidence that you’re living within your means.
If you have recent, substantial detrimental entries on your credit file, they’ll want to know why. But the question is: do you know what’s in your credit file? You’d be surprised how many people don’t.
If you have entries on your file, you’ll want to do your best to correct them before applying for a mortgage. Some of the entries may already have been resolved, but not removed by the creditor in question. If that’s the case, you can challenge any such entries. But if you don’t know they’re there, you’re leaving yourself vulnerable.
We recommend that every mortgage applicant get a copy of their credit report. Through CheckMyFile, you can see at-a-glance what all three of the main Credit Reference Agencies hold on file for you. Their service is free for the first 7-days, then £14.99/month thereafter. It’s well worth getting hold of, even if it’s just for your own peace of mind.
Getting a mortgage with bad credit
You can still get a mortgage with bad credit. But if you only have less than two years’ accounts, you’re leaving the door to rejection somewhat ajar.
To be successful, you’ll likely need a specialist lender and have a higher deposit. But it’s even more important to use a broker. Your circumstances really are what a lender would call ‘specialist’. As such, you’ll need a broker experienced with complex and adverse mortgage applications to demonstrate to an underwriter that you are mortgageworthy.
Open up lines of communication early. This will give you the best possible chance to repair your credit file. Since you’ll need a larger deposit and make reparations to your credit file, it may also help you define a realistic timeline.
The property itself
Not all homes are equal in an underwriter’s eyes. If the property you want to buy is of “non-standard construction” or needs huge renovations, you may struggle to get a mortgage.
Non-standard construction falls into roughly three categories:
- Structural materials: timber- or steel-framed homes, concrete (including prefabs) and cob, wattle and daub, or straw bale construction
- Roofing materials: flat or thatched roofs
- Irregular property types: listed buildings, barn or other conversions, high-rise flats or uniquely-constructed eco-friendly homes
6. Why you probably need an experienced specialist broker
In-branch staff and call centre agents like self-employed applicants to have at least two to three years’ accounts. If you haven’t been trading for at least two years, their rigid computer systems might automatically reject you.
A specialist mortgage broker acts as a middleman, and can interpret your two years’ accounts to prove your affordability. They know which lenders:
- Accept two years’ accounts rather than three
- Will consider net profits, rather than just declared income
- Are amenable to manual underwriting, rather than relying on computer algorithms
The bottom line is, you don’t need to wait another year to buy a home. You just need to find a lender who’s prepared to take your income and business on merit. The quickest, safest way to do that is by using an experienced broker with an established network of self-employed-friendly lenders.
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