Self-Employed Mortgage 2 Years’ Accounts
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Self-Employed Mortgage 2 Years’ Accounts
Paul Holland explains how to get a mortgage if you are self-employed with two years’ accounts.
Do mortgage lenders accept self-employed applicants with only two years of accounts?
Yes, they do. Actually, that’s the most common approach when lenders assess self-employed affordability. If you were to look at 10 lenders, seven would require the last two years. The other three either take the latest year in isolation or require three years’ records.
Will I need to have two full trading years or is part of a year acceptable?
Actually, you can use a part year with self-employment, although most lenders wouldn’t use that to derive an affordability amount.
Let’s say you’ve got an income of £50,000 for the past six months. They won’t take your annual income as £100,000 based on that. But they will look at the previous year and use the part year to justify that the previous year’s earnings are sustainable.
If last year you did earn £100,000, they would be more comfortable to take your income as £100,000. If the latest half a year was just £25,000, they might not see that full year as an accurate representation. So a part year can be a supplementary bit of evidence to get your mortgage over the line.
Are there mortgage lenders who will accept less than two years of accounts?
You can get a mortgage with one set of accounts, but there are caveats or restrictions. Only a handful of lenders would be comfortable with people only trading for a year.
But we do this frequently – that’s our specialty and our niche. Because there are a limited number of lenders, everything else needs to look good – your credit, affordability and financial conduct. But you certainly can secure a mortgage with one set of accounts.
Are specialist lenders a better option with only two years of accounts?
Probably not, because with two sets of accounts you will be accepted by the majority of the market. It’s not at all unusual to secure a mortgage with two sets of accounts. If you need to go to a specialist lender it may be because of another reason. The devil is in the detail with a recommendation from a broker.
But generally, if someone is suggesting that you should be using a specialist lender purely because you’ve got two sets of accounts, they don’t know what they’re talking about.
What if my second year shows lower profits than the first? Should my income be increasing or is fluctuating income acceptable?
Fluctuating income isn’t a problem as long as there is some rationale. It’s quite common with self-employment. People’s income goes up and down because they have seasonal work, because of market conditions, or reasons beyond your control. It’s not always a straight upwards trajectory.
If your income is lower this year than the previous year, the lender will take the most recent, lower figure. Perhaps your income was £100,000 last year and £50,000 this year – in that case, they would take £50,000.
If it were the other way around and it went from £50,000 to £100,000 they might average that out. Some lenders might even be inclined to take £100,000 if you can give them a part year to justify that.
Can I include other income sources? Will I be assessed on net profit, gross income or dividends?
You can use other income, yes. If you’re self-employed, you’ll need to submit something called an SA302. A tax return produces that document, also called a tax calculation. All your income from all sources will be listed on that and you can use it for your affordability.
Some lenders will take all income sources, others may take some of them. You could potentially put all of them towards your affordability.
A sole trader will state the profit from self-employment on that document, which is effectively your turnover minus your expenses. Let’s say you turned over £100,000 and it cost you £20,000 in expenses. You then have a profit from self-employment of £80,000, and that’s the figure lenders use for the affordability calculator.
If you’re a limited company director, you can use a combination of your salary and your dividends, which is similar to the income for a sole trader – the profit from self-employment. But there is a separate approach which allows you to use a combination of your salary plus the share of the net profits in your business.
If you’re a 100% shareholder and the net profit in your business was £100,000, you could add that to your salary. Perhaps that might be £110,000. Now, if that amount is bigger than your salary plus your dividends, that might be an approach you want to take.
On top of that, if you have rental income or other sources on that tax document, you can add those to that total as well.
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Do I need an accountant to prepare or certify my accounts?
If you’re a limited company, it’s a good idea to have an accountant, but it’s not essential. There are a couple of lenders who look at limited company accounts that have been processed by the applicant.
Personally, I would advise you to have an accountant, but if not, for whatever reason, there would still be a couple of lenders for you. However, it may not be best to restrict yourself to a couple of lenders as a self-employed person, as if there are any other issues at all it’s going to be difficult to place that business.
If you’re a sole trader, it’s fine not to have an accountant. It’s relatively straightforward to submit records to HMRC without that expertise. It’s your choice in that instance.
What documents do I need to apply for a mortgage with two years of self-employed accounts? Are personal and business bank statements required?
At the very least, you’re going to need your tax calculations, also known as SA302s, and corresponding tax year overview documents. One is like a bill and one is a receipt for your tax. You also need corresponding personal and business bank statements. The latest three months is the minimum for both personal and business bank accounts.
Some people have business accounts as a sole trader and you will definitely have a business account if you’re a limited company. You also need to show personal bank statements showing the income going into that account.
Also on that list is ID proving your name and address and deposit proof. There may be more documents that a lender wants to see, depending on your circumstances, but these are the essentials.
How much deposit do I need if I only have two years of accounts?
The moment you’ve got 5%, start having a conversation – you can get a mortgage with that as a self-employed person. Start discussing your options as it’s very possible at that stage.
Can I still get a high Loan to Value mortgage as someone with two years’ accounts?
90% or 95% are classed as high Loan to Value. It’s a very similar question to the previous one. You absolutely can go up to 95% as a self-employed applicant with two years or even one year of accounts. It’s not too different from being employed.
Once you’ve got that one set of accounts, they’ve got a figure to work with. If you can afford the mortgage that you need, you’ve got decent enough credit and a 5% deposit, you should be exploring your options.
Will my credit score impact my eligibility more because I’m self-employed?
No, it doesn’t really have an impact on getting a mortgage just because you’re self-employed. Having said that, your credit score is probably the biggest factor when getting any mortgage, so it’s something to pay attention to.
But don’t think because you’re self-employed, a less than perfect score is a double whammy. You still have options, just like anybody else.
Is it better to go through a mortgage broker for a self-employed mortgage with two years’ accounts?
I find that even mortgage brokers struggle with self-employed cases purely because they aren’t experienced enough in that field. Someone who’s done hundreds of mortgage applications can still find it difficult to place a case.
I suggest it’s worth finding a mortgage broker that knows about self-employed mortgages, because these can be difficult. Someone who’s experienced in something difficult will make it look very easy.
But certainly, don’t try and find a self-employed mortgage by yourself. It’s not a walk in the park, and you shouldn’t expect to be given hundreds of thousands of pounds without jumping through some hoops.
Work with someone who knows what they’re talking about and you’ll find it much easier, I can assure you.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
For specialist tax advice, please refer to an accountant or tax specialist.
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