Self-employed mortgages are far from as difficult to get as they used to be – but you might find that some lenders are reluctant to consider your application if you have been trading for one year or less.
As a standard, the majority of mortgage providers prefer self-employed applicants to demonstrate their average income with two to three years of accounts and tax returns, which may be impossible.
Today, Think Plutus runs through the varying lender attitudes to newly self-employed mortgage borrowers and some of the relevant criteria and eligibility terms you need to know before you apply.
Can I Apply for a Mortgage After One Year of Self-Employment?
Usually, you will be able to secure a mortgage with a short self-employment history, but this may limit the lenders you can apply to and the amount you can borrow.
Lenders use your income to decide how much they can offer and the repayments they believe you can afford when considering other living costs and pre-existing debts.
It is difficult to find a self-employed mortgage with a short trading history because you do not have any evidence that quantifies how much you are likely to earn.
Income tends to vary from one year to the next – hence the typical requirement for two or three sets of accounts to reach a rough average.
Some lenders will consider newly self-employed applicants with as little as nine or ten months of business records, but they are very likely to refuse if your accounts show a loss.
Who Is Eligible for a Self-Employed Mortgage?
Another area of complexity in self-employed lending is that there are multiple different types of businesses and roles that constitute self-employment.
Applicants might be:
- Sole traders
- Company owners
The standard is that if you own 20% or more of your company, you are self-employed, rather than an employee paid a fixed wage by another business.
You can get self-employed buy-to-let mortgages as well as residential mortgages. Still, as we have explained, this becomes much more challenging if you have little trading history or other adverse risk factors, such as a low credit score.
Borrowing Limits on a Self-Employed Mortgage
Lenders use your income to determine the maximum they will lend, which can be anywhere from three times your annual earnings to five times or even more.
A short trading history increases the lender’s perceived risk because they will not have the level of assurance they need that your income will be stable and remain at a similar level as the last few months.
However, trading income is one of many elements of a mortgage assessment – lenders will also consider:
- Your profession, qualifications and experience.
- The sector or industry you work in.
- Credit score and other debts or obligations.
Another difficulty is that lenders use different calculation models to determine their average income.
For example, some will offer mortgages for company directors, including all salary and dividend income, plus retained company profits as the basis for your affordability assessment.
A self-employed business owner might be able to include every aspect of their income, including bonuses and dividends they have extracted from the company – but other lenders might not include each element in their income analysis.
Applicants with a year of trading records are likely to need a specialist mortgage lender, particularly if they want to borrow a high multiple of their average yearly earnings.
You might also be able to support your application with projections, forecasts or details of confirmed jobs or contracts that demonstrate that your income will be stable or higher in the year ahead.
Demonstrating Income for a Self-Employed Mortgage With a Short Trading History
The primary way to show a mortgage lender your income is to collate trading records, tax returns and other relevant documentation from the previous 12 months.
Most lenders will ask for accounts to have been certified by a professional accountant and will check whether these correspond with your filed self-assessment tax return figures.
As a sole trader, your income and that of your business are legally one and the same (an unincorporated company is not a separate legal entity).
Still, if you have a partnership, the lender will usually consider your income as your percentage share of the profits.
Limited company directors will need to provide copies of finalised accounts, and your income might be assessed as salary plus dividends or could include your proportion of the net profit.
Working with a skilled broker can make a considerable difference because we recommend the most appropriate lenders offering flexible income assessments to match your borrowing requirements.
Applying for a Self-Employed Mortgage After Rejection
Finding a mortgage with a year of self-employed accounts is possible, but a high street lender is unlikely to be the best option.
A lender who feels there is too high a risk or insufficient trading information to support a mortgage offer may reject any self-employed person with less than three years of financial records.
However, one mortgage refusal is far from a reason to assume every lender will adopt the same stance.
Think Plutus often works with applicants with unusual circumstances who cannot meet the standard eligibility terms.
Our role is to assess your requirements, make independent suggestions, and liaise with your preferred lender to address any concerns they may have.
Self-Certification in Self-Employed Mortgages
We are often asked about the process of self-certification, which was an option pre-2011 whereby self-employed mortgage borrowers could state their own income without supporting evidence or documents.
This method of mortgage processing was discontinued, since it became apparent that borrowers would often inflate their earnings to secure a mortgage they could not afford.
As a result of spikes in repossessions, lenders now need to be far more stringent about who they offer a mortgage product to and on what affordability basis.
Residential mortgages fall under the Financial Conduct Authority (FCA) scope, so a lender must legally run checks and assessments before making an offer and cannot accept self-certification as proof of income.
Because of these regulatory rules, lenders tend to ask for two or three years of accounts as a minimum since it discharges their responsibility.
However, some niche lenders will consider a broader range of circumstances and evaluate your professional expertise, financial history and projected earnings before making a decision.
Newly Self-Employed Mortgages for Different Professions
Your career may well influence your mortgage application outcomes because some professions, such as accountancy, medicine and law, are treated somewhat differently than any other business.
Think Plutus has published several guides explaining the mortgage lending sector in relation to different positions, which may provide further information about the impact of your role on your mortgage application.
Please visit the quick links below to learn more:
- Mortgages for Professionals
- Mortgages for Doctors
- Mortgages for Locum Doctors
- Mortgages for Contractors
Self-Employed Mortgages With One Year of Accounts and a Low Credit Score
Bad credit mortgages are normally a viable alternative to a conventional mortgage if you have a low credit score, no credit rating, or adverse credit issues on your credit file.
Your risk profile and available lenders will already be significantly impacted if you are self-employed with one year of accounts, and any credit problems could add to this challenge.
It is not necessarily impossible to find a mortgage, but you will almost certainly require professional support from a broker and will often pay higher interest rates and mortgage fees than a less high-risk applicant.
In most cases, you will also need a higher minimum deposit of at least 15% of the purchase value. However, much depends on the nature of your credit issues and the severity of reports on your credit record.
The best option may be to spend some time repairing your credit score while you accumulate a longer trading history, particularly if you are keen to avoid taking on a mortgage with unfavourable terms.
Advice for Self-Employed Mortgage Applicants With One Year of Accounts
You can do plenty of things to improve your mortgage prospects and provide supporting information with your application that will lower the lender’s risk assessment.
As a basic checklist, we recommend:
- Applying to a specialist lender with guidance from an independent, whole-of-market broker who can suggest the most suitable mortgage providers.
- Offering the highest possible deposit, and at least 15% or above.
- Minimising any other outstanding debts, paying down credit cards, improving your credit score, or waiting for old credit issues to be removed from your report (after six years).
- Keeping savings in a personal account – if you have repaid all outstanding short-term debts – and including evidence of a healthy business bank account and a profit-making first year.
- Offering additional documentation such as forecasts, forward contracts or ongoing work agreements that show future income.
Think Plutus has years of experience working with a broad range of self-employed business people and will be happy to offer further information about anything included within this guide.
Please reach out at your convenience if you would like to discuss your mortgage requirements and the best options to proceed and improve your approval prospects.
Frequently Asked Questions
We appreciate that there is a lot of information to absorb and a huge range of variables that may impact your self-employed mortgage choices if you have one year of trading accounts or less.
Below, the Think Plutus team has run through some of the commonly asked questions we receive about self-employed mortgages to help you make informed decisions about the right way forward.
How Does the Type of Business Affect a Self-Employed Mortgage Application
Most businesses will be assessed on similar criteria, regardless of the nature of the company or sector.
However, professional self-employed people may find that their recommended lenders differ because there are mortgage providers with specific mortgage products or eligibility rules that apply to particular professions.
The most important factor is to prove that you earn a sustainable income from your self-employment and can afford the repayments for the long term.
Are Specialist Self-Employed Mortgage Lenders Regulated?
Yes, any lender selling residential mortgage products within the UK must be authorised and approved by the Financial Conduct Authority (FCA) and is subject to all the rules and regulations as any mainstream lender or high street bank.
Many people perceive a ‘specialist lender’ as less credible, but the reality is that they are less standard organisations that have different terms and policies depending on their areas of lending expertise.
How Does a Mortgage Lender Calculate Affordability for a Self-Employed Applicant?
The usual process is to take your earnings from the last two or three years and calculate an average to use as your baseline income level for the affordability assessment.
Some lenders will include retained earnings, and others will calculate your maximum mortgage based on your last year of trading – although this is less common.
If you can prove that your income has changed dramatically in the last trading period and will continue at this elevated level, you may be able to borrow more.
You can prove your income with sets of certified financial statements or self-employed tax returns downloaded from your HMRC account.