Can I get a mortgage with two years’ self-employed accounts?

Why lenders make it harder for self-employed people

When a bank or building society lends money for a mortgage, it must feel confident you can meet the monthly repayments. People who are employed on the standard PAYE (Pay As You Earn) tax regime tick those boxes. Lenders take confidence from their regular, monthly payslip. Underwriters, the ultimate decision makers, can see exactly how much money arrives in your account and when.

When you’re self-employed, your income may fluctuate from month to month. Lenders often interpret this as a risk. So, before they agree to lend, they need firmer evidence of your income.

The most common way they get that evidence is from your business accounts, coupled with SA302s and personal bank statements. Those accounts, in almost all instances, will need official sign-off from your accountant. Combined, these documents give the underwriter visibility to your true mortgage affordability.

How many years’ accounts do I need?

Most high street lenders (such as Barclays, Lloyds, and HSBC) prefer to see two to three years’ accounts. Some of these traditional lenders will insist on three.

However, specialist lenders are more flexible. Specialist lenders are mortgage providers that focus on more complex income, such as that of self-employed applicants. Many will consider applications from people who have two years’ accounts, or even less.

With these specialists, two years’ trading history is, in most cases, enough to secure a competitive mortgage. You just need to find the right lender, which you may struggle to do on your own. They tend not to have a high street presence, and often advertise as ‘intermediary-only’. This means they’ll only accept applications pre-vetted by a specialist mortgage broker, like Freelancer Financials.

What documents will I need?

Unlike in the days of ‘self-cert’ mortgages, you can no longer simply tell the bank what you earn. You must prove it using official documents; here’s what specialist lenders typically ask for:

Accounts signed off by a qualified accountant

Lenders trust figures checked and approved by a professional far more than any you may have prepared yourself. Make sure a qualified accountant signs off your accounts before you apply.

HMRC documents: SA302 and Tax Year Overview

Your SA302 is a document from HMRC (His Majesty’s Revenue & Customs). It shows exactly how much income you declared for tax purposes each year. You can download your SA302 directly from your HMRC online account.

Your Tax Year Overview is a second official HMRC document. This one proves you have actually paid the tax on your income. Lenders ask for this alongside the SA302.

Bank statements

In conjunction with your signed-off accounts and HMRC documents, lenders will need your bank statements. Your business bank statements will show the health of your business. Your personal statements will give them an idea of your disposable income.

Depending on the lender, they’ll ask for either three to six months of each. They’ll deduce your income for mortgage affordability purposes using a combination of all these documents.

Important note: Lenders will only take into consideration income you’ve officially declared to HMRC. If you’ve deliberately declared less income than you earned, the bank will use only the lower, declared figure. Your accountant may have advised you to declare less to reduce your tax bill. This might save you money in the short term, but it will reduce how much you can borrow.

How much can you borrow?

The amount you can borrow depends partly on your payment structure. Here’s a simple overview of the three most common ways self-employed people run their businesses:

Sole traders and freelancers

If you’re a sole trader, lenders look at your net profit. That’s the money left over after you have paid your overheads and business expenses. They usually take the average of your net profit over the last two years.

If your income has been growing, a specialist lender may use only your most recent year. This is your income or business trajectory. Using only the most recent, profitable year could allow you to borrow more.

Limited company directors

If you run a limited company, lenders usually look at a combination of your salary and drawn dividends. Again, this is the money you pay yourself from company profits, which your accountant may have told you to keep purposefully low.

Keeping salary and dividend drawing low can create a problem. Many directors pay themselves a low salary and leave money in the company for tax reasons.

A traditional lender may not count the money left in the company, reducing your borrowing ceiling. In contrast, a specialist lender may also factor in your share of the company’s net profit. This additional inclusion often means you can borrow significantly more.

Contractors

Lenders who specialise in contractor mortgages use an affordability calculation called contract-based underwriting. This uses your daily rate (what you charge clients per day) as the basis of what you can borrow.

The average standard calculation is: daily rate × 5 days × 46 or 48 weeks = annual income. This method avoids accounts, retained profits and dividend drawings because it works off your gross day rate. It allows most contractors to borrow much more than if the lender assessed them as a standard self-employed applicant.

In all cases, as a rough guide, most lenders will offer a mortgage of 4.5 to 5.5 x your annual income. The key is to access underwriters who know how to interpret that income from the documents they ask for.

Sadly, in most cases, you can’t access those underwriters in a high street branch or a call centre. They rely on specialist brokers to effectively vet applicants before they’ll even look at a mortgage application.

Other key elements of self-employed mortgage lending criteria

Your accounts or day rate form only part of the affordability picture. A specialist lender will also consider:

Your deposit

The more money you can put down up front, the better. A larger deposit means the lender is taking less risk because you’ll be securing a higher amount of equity from the outset. It also shows that you have been able to save steadily, giving lenders more confidence in your ability to meet repayments.

Most lenders ask for a minimum deposit of 5–10% of the property’s value. But a deposit of 15–20% (or even more) will give you access to better rates and more lenders.

Your credit history

Lenders will check your credit record to see whether you have a history of paying bills on time. Almost all types of borrowing appear on your credit history, everything from mobile phone contracts to ‘buy now, pay later’ credit, and much more.

Before you apply for a mortgage, you should get a copy of your credit report so you know what it shows. You can then challenge any erroneous or outdated entries with that creditor and have them removed.

Lenders use at least one (often two) of the three major Credit Reference Agencies: Experian, Transunion and Equifax. Services such as CheckMyFile let you see what all three hold on file for you. If you’ve experienced financial problems in the past, it’s still possible to get a mortgage. But with missed payments, defaults, or court judgements, you’ll likely need both a specialist lender and a larger deposit.

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The home you’re buying

Some properties are harder to get a mortgage on than others. These include:

• Properties built with unusual materials such as prefabricated concrete, timber frames, or thatched roofs
• Listed buildings,
• Barn conversions
• High-rise flats
• Properties in poor condition.

If the property you want to buy falls into any of these categories, tell your broker early. Their inherent knowledge will help form their decision of which lender to approach.

Why you should use a specialist mortgage broker

Applying for a mortgage on your own is unlikely to give you the best result if you’re self-employed. By walking into a bank branch or calling a lender directly, you’ll miss out on specialist underwriters who understand that how you work isn’t as black and white as a salaried employee.

Branch staff and telephone advisers are trained to deal with straightforward cases (employed applicants with payslips). If your situation is more complex, they may reject you outright. Or they’ll offer you a much lower amount than you could actually borrow with sympathetic lending criteria.

Every time you apply for a mortgage, it leaves a mark on your credit record. If you apply to the wrong lender and they reject you, that’s a black mark against you.

You only get so many chances before you irrevocably damage your immediate credit history. Do this several times, and your credit record begins to look problematic. It’s a downward spiral that will make it much harder to get your application approved.

A specialist mortgage broker who understands self-employed income will:

• Know which lenders will consider your application before submitting anything on your behalf,
• Know which lenders accept two years’ accounts or fewer (rather than requiring three),
• Know which lenders include company profits, dividends or use day-rate calculations in affordability calculations
• Present your income to an underwriter in the clearest and most favourable way.

In short, using a specialist broker means you apply to the right lender, first time.

The bottom line

Having two years’ accounts won’t necessarily stop you from getting a mortgage. It just means you need to work with the right lender. You should find one who understands self-employed income and is prepared to assess your application based on its merits.

The quickest way to find that lender is through a specialist broker with an established network of self-employed-friendly lenders. Freelancer Financials has been securing mortgages for self-employed workers for over 20 years. Leverage their access to more than 30 specialist lenders to get you the mortgage your income and hard work deserve.