When searching for a mortgage as a newly self-employed person, you may find that many mainstream providers are reluctant to make an offer. It can be tough to find a competitive mortgage if you have less than two or three years worth of accounts to demonstrate your income.
However, Revolution Brokers work with specialist lenders who are happy to support applications from:
- Company Directors who have been trading for between 9-12 months.
- Sole traders who have been in business for under a year.
- Businesses who have changed their trading style or have recently incorporated.
- Contractors who have been working on their existing contract for under one year.
- Self-employed people who have bad credit and have traded for less than a year.
- Buy-to-let investors who do not have a separate income stream.
- Help to Buy applicants looking for up to 95% Loan to Value mortgages.
Here we've listed some of the most commonly asked questions, and things to look out for when seeking a self-employed mortgage under any of these circumstances.
If you would like more personal support, help with finding the right mortgage for you, or advice about which mortgage lenders can accept your application, then contact the Revolution Finance Brokers team on 0330 304 3040 or send us a message to firstname.lastname@example.org.
Is it possible to find a mortgage if you have been self-employed for less than 12 months?
It certainly is. The Revolution team regularly works with clients who have been self-employed for under a year and therefore have been rejected by their bank or mainstream lenders who require a minimum number of years worth of accounts.
Likewise, we hear from clients who are reluctant to apply without having a long trading history and feel that their application is likely to be turned down or are uncertain about what sort of information they might be asked to provide.
There is no doubt that a mortgage for a self-employed person with less than two years of accounts is more challenging - however, it is by no means impossible.
Revolution Brokers is a specialist in niche mortgages, and works with lenders who take different approaches to assess each application, and can even lend to newly self-employed people who have an adverse credit history.
Is there a minimum period of self-employment before I can apply for a mortgage?
Typically, mainstream lenders will require three years of accounts. That is because they need to know what your income looks like and use this information to calculate affordability.
Some lenders will accept two years of accounts, and a minimal number will accept an application with statements showing one year of trading - however, the less time you have been trading, the more specialist a product your mortgage becomes.
If you have been trading for as little as nine months, Revolution can negotiate mortgage offers provided you have an anticipated timescale for your first years accounts to be drawn up, and will be working with a qualified accountant to verify the figures filed.
Can I get a mortgage in my first year of self-employed trading?
The majority of lenders are not able to offer a mortgage if you haven't yet filed your first tax return as a self-employed person.
However, specialist lenders can, and the Revolution team works with several niche mortgage providers who have the flexibility to consider less simple applications.
In the past, it was almost impossible to secure such lending because mortgage providers must lend responsibly.
If they didn't have a filed set of accounts or returns, they couldn't verify your income, and therefore couldn't offer assurances that they knew you would be able to keep up with the repayments.
In essence, mainstream lenders need to have 'official' figures showing your income and what tax you have paid. Even if you have been trading extremely profitably for the first six months, they need to check that the mortgage is affordable long-term.
However, as the lending landscape evolves, some lenders can now consider applications from self-employed people within their first year of trading, usually from around the nine to ten-month mark.
The structure of the application depends on the lender:
- Lenders can assess an application, offer an agreement in principle, and then make a formal offer to lend once they have the first year's figures available.
- Other lenders can make a full offer on the strength of preliminary figures.
- Different lenders will approve an initial agreement, and will base this on trading thus far, but won't complete the mortgage until the year has ended.
Most mortgage offers have a three month expiry date, so you can make the application in advance, use the agreement in principle to support an offer made on a property, and then proceed with the application once the first year of trading is complete.
Revolution brokers will usually look at your anticipated net profit, plus any other income including salary and dividend payments, and use this as the affordability basis.
For example - if you anticipate earning £20,000, then the decision about how much you can borrow will be based on this.
Credit scoring usually remains unchanged, provided your income doesn't end up being dramatically different from your estimate, so often, the projected lending offer doesn't vary significantly once actual figures are known.
Can I apply for a mortgage if I've been self-employed for less than two years?
You can, and the same conditions usually apply for applicants who have been trading for less than one year, since there will be only one full set of accounts available for a lender to review.
Some lenders will accept projected figures. For example, if you have one year's worth of accounts, are nine months into your second year, and can provide draft figures projected to the end of the trading period, this can be used to calculate how much they can offer to lend.
Who is eligible to apply for a self-employed mortgage after one year?
Every lender has different criteria but generally speaking there isn't any restriction on what sector or industry you work in, or a particular area of work that would make your application more or less likely to be successful.
The key criteria for a self-employed mortgage where you have less than three years of accounts are that:
- The business is viable.
- It is trading as a going concern.
- You have a sustainable income.
Some of the most common applicants for self-employed mortgages include:
- Taxi drivers
- Investment landlords
- Builders and contractors
- Tradespeople, such as plumbers, electricians and painters
- Musicians and those in creative industries
- Financial sector professionals
- Independent retailers
- Online traders and businesses
- Investors and other professionals
Why is it more challenging to get a self-employed mortgage after a shorter period of trading?
The reason that self-employed mortgages are more specialist is that it isn't as clear how much you earn, and how much you can expect to make in the future, as it is with salaried permanent employment.
After three years of self-employed trading, you have a track record and a financial history, which means a lender can usually apply the same criteria as they would to somebody who is employed.
However, after one or two years, lenders consider a self-employed applicant higher risk because they have less financial history to go on.
In the past, many self-employed people used self-certified mortgages, where they bore the responsibility of declaring their income, without needing evidence, and could then borrow whatever amount they wished to against those declarations.
However, this caused widespread issues when declared values were far higher than actual earnings, which resulted in mortgages being unpaid, and properties repossessed in the worst-case scenarios.
Now, lenders must perform affordability assessments and use tangible evidence of your income before they can make an offer to lend.
This has made it much more complicated for self-employed people to secure a mortgage, and Revolution regularly works with tradespeople who have found it very difficult to find lending.
As freelance work, start-up businesses and self-employment continue to increase in popularity, it is ever more essential to work with a broker with experience in this area of the mortgage market who can help you find the right deal.
How much can I borrow after one year of self-employment?
Most lenders will use similar criteria to calculate the maximum they can lend you. This depends on:
- Your credit score
- Your income
Typically, the maximum offer will be up to five times your annual earnings. Some specialist lenders can offer a higher multiple, depending on your wage, and being able to demonstrate that you can afford the repayments.
In some cases, a lender will consider projected income. This is usually where the years trading hasn't yet finished, or accounts haven't yet been filed.
For example, if you have been self-employed for 20 months, you will have one set of filed accounts plus nine months of the current year.
Say the current year is going well, and you can show that your income is much higher than in year one. In that case, if you are applying to borrow over the five times multiple of your income in year one, an underwriter might be happy to use an accounting projection to calculate your affordability.
As an illustration:
- Year One: net profit of £22,000 over 12 months.
- Year Two: net profit £25,000 so far after nine months of business.
Suppose your accountant agrees that trading is expected to continue earning a similar value for the remaining three months of the year. In that case, they may be able to provide a projection stating anticipated net profit of £33,300, a significant increase on £22,000 net profit in year one.
In this scenario, a lender might:
- Consider only year one, with a maximum being five times £22,000, or a maximum mortgage of £110,000.
- Consider the projected figures from your accountant for year two, with the five times maximum based on £33,300 net profit, or a maximum mortgage of £166,500.
In any mortgage application where you wish to use projected figures, the process will be more complex and involve more negotiations with your lender.
Still, if you have been self-employed for less than two years, it is worth noting that a broker can work with you to secure a higher value mortgage than a mainstream lender might be able to lend.
How can I prove my income as a self-employed mortgage applicant?
Each lender might have different requirements, but usually, you will be asked for:
- A reference from a qualified accountant.
- Copies of final accounts.
- Your self-assessment tax return (SA302)
The net profit shown on those figures is then used to arrive at the five-times multiple of your income to indicate the maximum they can lend.
How do mortgage lenders calculate self-employed income?
By and large, the calculations are the same, whether you have just started trading or have been in business for a decade.
The same calculations are used for sole trade mortgages as for partnerships, and the figure a lender will consider is usually:
- Your share of net profit, as shown in the accounts.
- The total income received from your business.
- The income declared on your self-assessment tax return (SA302).
If you are a director of a limited company, lenders will consider your salary received, and the dividend paid to you as shown on the company accounts, or the reference from your accountant.
What mortgage lenders can I apply to if I have been self-employed for one or two years?
The lenders who can consider these applications will usually be able to accept between one and three years of accounts - three years is typically the maximum a lender will request.
The right lender for you depends on multiple circumstances, and the Revolution team can assess this with you to recommend the right mortgage providers to apply to, whose criteria we know you are most likely to meet.
- How much you earn.
- The Loan to Value (LTV) ratio - i.e. how much you want to borrow against the value of the property.
- The total amount you wish to borrow.
- Location of the property.
- What type of residence you wish to buy.
- Your credit history and credit score.
There are mainstream banks and highstreet lenders who may consider self-employed mortgage applications. Still, the more unique your circumstances, the more critical it becomes to work with a specialist lender.
Every mortgage provider that Revolution Finance recommends is a trusted lender and is regulated by the Financial Conduct Authority (FCA).
Is it possible to get a self-employed mortgage if I have bad credit and have been trading for one year?
Although it may be more challenging, yes you can secure a mortgage after trading as self-employed for one year, even if you have a bad credit history.
The type of lender who can consider this sort of application will be a specialist, and will usually have a few conditions before they can offer to lend. These terms are always negotiated by the Revolution team, but typically will include requirements such as:
- Minimum 15% deposit, or 15% equity for a remortgage.
- Credit history clear of defaults, CCJs or mortgage arrears in the last two years.
Often, if you have minor credit issues such as a missed or late payment in the last year, or a late payment to a mobile phone provider, these can be overlooked.
Can I use Help to Buy for a self-employed mortgage after one year?
You can, yes, if you have a 5% deposit and pass the other eligibility checks, such as credit scoring, you can apply for a Help to Buy mortgage.
Usually, only niche lenders will consider a self-employed Help to Buy mortgage, but those that do offer highly competitive rates.
Is it possible to remortgage after one year of self-employed trading?
It is - and usually, the same conditions will apply.
If you have been self-employed for one year and have filed accounts either verified by an accountant for a limited company or have filed a self-assessment tax return with HMRC as a self-employed person, you can apply for a remortgage.
Professional support with self-employment mortgages
If you have been self-employed for less than three years, have struggled to find a self-employment mortgage, or have been turned down for a mortgage, contact the Revolution Finance team.
We work with a network of respected mortgage lenders who can offer specialist lending, with competitive terms and rates.
Contact the team today on 0330 304 3040 or drop us a message at email@example.com.