Mortgages for the self-employed

Why this is harder than it should be

Being self-employed is not a problem for lenders. Proving your income to a computer is.

An employed applicant hands over three payslips and the conversation is basically over. You hand over two years of accounts, a couple of SA302s, six months of bank statements and an explanation of why last March looked odd, and somebody you have never met decides whether your living is real.

It is not personal, and it is not a judgement on your business. It is a process built for payslips, being asked to cope with something else.

The good news is that the rules are knowable. Every lender publishes its criteria. Knowing which ones fit how you actually earn, before you apply, is most of this job.

How many years do you need?

The honest answer: usually two, sometimes one, occasionally three.

Two years is the common requirement. Two full sets of accounts or two years of SA302s, with the lender either averaging them or using the lower figure.

One year is possible with a smaller group of lenders where the business is established and the figures are solid. The choice narrows, but "I have only been trading a year" is not the end of the conversation people assume it is.

Three years occasionally comes up for more unusual trades or where the income swings about.

If your latest year is your strongest, timing matters. Filing your accounts and then applying can produce a very different answer to applying the month before. It is worth asking the question before you start, rather than finding out afterwards.

What counts as your income

This trips people up more than anything else, so plainly:

If you are a sole trader, lenders generally look at your net profit, the figure after expenses, not your turnover. It is the number on your SA302, not the number in your bank account on a good month.

If you are a limited company director, it is usually salary plus dividends, though some lenders will look at salary plus your share of net profit instead. That difference can be substantial for anyone who leaves profit in the business. There is a lot more on this on the business owners and directors page and in my article on limited company director mortgages.

If you work on a day rate, through CIS, an umbrella company or your own limited company, a number of lenders will work from the contract rather than the accounts. For contractors in their first year or two, that route is often more generous than the accounts-based one.

If it is a mix, which it often is, it needs unpicking properly rather than squeezing into whichever box the form offers.

The thing to take from that list: the same person, with the same income, can get four different answers depending on which door they knock on. That is not a scandal, it is just how criteria work, and it is why the order you approach lenders in matters.

The tax bill paradox

Here is the bit nobody enjoys.

A good accountant's job is to keep your taxable profit as low as legitimately possible. A lender's job is to lend against your taxable profit. Those two aims point in opposite directions, and nobody tells you until you want to buy a house.

You end up with a tidy tax bill and a smaller mortgage than you expected, having done absolutely nothing wrong.

There is no clever fix and anyone promising one should be ignored. What helps is planning: knowing which lenders look beyond drawn income, understanding how your accounts will read, and timing an application sensibly. That is a conversation between you, me and your accountant, ideally a year before you need it rather than a fortnight.

What to have ready

Nobody has ever enjoyed finding their own SA302s. Get it over with in one afternoon and the rest of the process is dull in the best way:

• Two years of SA302 tax calculations and tax year overviews from HMRC
• Two years of finalised accounts, if you trade through a company
• Three to six months of personal bank statements, and business statements too
• Your current contract, if you work on a day rate
• Photo ID and proof of address
• Your accountant's details, in case a lender wants a reference

A complete file reads as an organised applicant, and underwriters are human. It will not change the criteria, but it changes the pace.

Situations I see most weeks

One strong year after a quiet one. Which lender you approach decides whether the average or the latest year is used, and the gap between those two answers can be big.

A dip caused by one-off costs. A van, new equipment, a bad debt. Some lenders will consider the explanation, some will not look past the number.

Recently gone limited after years as a sole trader. The business is the same, the paperwork looks younger. Certain lenders will take the earlier history into account.

Income from two trades. A day job with freelance work on top, or two businesses. Workable, and it usually needs a lender who assesses both rather than ignoring one.

A credit blip. Missed payments from a lean stretch do not rule you out. They narrow the field, and I would rather know about them before a lender does.

A big loan with complex income. If the numbers are larger or the structure is more involved, start with the high net worth and complex income page.

Before you apply anywhere

Three things worth doing, none of which costs anything:

1. Check your credit file with all three agencies. They hold different information, and the one you have never looked at is the one with the error on it.

2. Get on the electoral roll. It takes five minutes and solves a surprising number of problems.

3. Try the Mortgage Ready questionnaire. Ten questions, about three minutes, a score out of 100 and the two things worth sorting first. No credit check, no mark on your file.

And the one not to do: apply to several lenders to see who says yes. Every application leaves a footprint, and a string of them in a fortnight reads badly to the next lender along.