One of the most common questions we get asked is – if I’m self-employed, how will lenders assess my income and affordability? In this blog, we give an overview of the different ways that lenders assess the income of the self-employed for the purpose of mortgage lending.
If you are self-employed than mortgage lenders will assess your income based on their criteria for self-employed applicants. This includes sole traders, contractors, and company directors of a limited company or partnership. A special mention should also go to the Construction Industry Scheme ( CIS ) as lender asses the income from this scheme in a different way.
There’s a wide variety of mortgages which are suitable for self-employed people. It’s always worth speaking to a whole-of-market mortgage broker, such as the broker Hey Mortgages, regarding your needs. This is because here are some lenders out there that specialise in these products. The general public would not have access to some of their deals.
How mortgage lenders assess self employed income and affordability
Different lenders assess self employed income in different ways. Importantly, each method can result in a large difference in the amount they the self employed applicant can borrow. Here are the main ways lenders assess self employed income:
An average of income over recent years, using figures from HMRC tax calculations. This is how the majority of lenders assess self employed applicants. They will take the last 2 or 3 years’ of income as accepted by HMRC through the Self Assessment tax process. The figure they use as a baseline is the figures on the HMRC SA302 or Tax Calculation form. This applies whether you’re a sole trader or a director in a limited company.
The income from your most recent complete year of trading. Some lenders will use the figures from your most recent SA302 on its own. But if there is a big jump in income in this most recent year, these lenders will still prefer to revert to an average.
For limited company directors only: some lenders will look at a director’s salary, plus the net profit (after corporation tax) in the company accounts. Some lenders will use an average of these figures over recent years, and some may use the most recent year’s figures. Again, if there is a big jump in salary or profit, they may revert to using an average. Of course, the amount of shares you hold in the company affects this calculation. N.B – there are a very small number of lenders that will use salary, plus net company profit before corporation tax.
For Construction Industry Scheme (CIS) contractors only: CIS contractors are self-employed sole traders. With this in mind, most lenders will use an average of income over recent years from the SA302 / Tax Calculation forms. However, a small number of lenders will use the gross income from the last 3 to 6 months of CIS statements.
For other contractors, working on a day rate only: some lenders will assess income based on a day rate and a contract. For example, a day rate of £500, multiplied by 5 (to make a week’s income), multiplied by 46 working weeks.
Bear in mind that with regards to all of the above, the same basic affordability rule still applies: the larger your income, the more you can borrow.
It isn’t difficult to get a mortgage if you’re self employed, but it is difficult to calculate exactly how much borrowing is available to you, based on your circumstances.
Get in touch with us today and we can fill you in so you have accurate information to hand.
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