Self-Employed 1 Year Accounts Mortgage
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Self-Employed 1 Year Accounts MortgageJoanne Markham talks us through the process of getting a mortgage with one year’s accounts if you are self-employed.
What are the requirements for getting a mortgage as a self-employed individual with one year’s accounts?
As a rule, it’s not really acceptable for the majority of lenders. They want two years’ accounts and usually take an average across these, because being self-employed is very different to being employed.
However, we do have a handful of lenders that will allow one year of accounts if the case looks right. Previous experience in the role can be important.
For example, if I were employed as a mortgage advisor and then went self-employed in the same job, and I had a year’s accounts, they would probably take that. A couple of lenders that say they only take two years’ accounts will make exceptions for people with experience in the same employment.
So if you’ve been employed as a builder and then decided to start your own business, if you can prove your history within the building industry with a P60, for example, a lot of lenders will accept that.
Don’t assume that if you just have a year’s accounts you can’t get a mortgage. If you’ve got history within your industry, that will help you massively.
What is acceptable proof of income for a self-employed mortgage applicant with 1 year’s accounts? What documents do I need?
Ideally, it helps to have an accountant rather than doing it yourself. You’re going to need a tax calculation and tax year overview, which are produced once you’ve submitted your self-assessment with HMRC – or your accountant submits it for you.
As a rule, lenders average the last two years – so if you’ve earned £22,000 last year and £26,000 this year, they will add the two together and divide by two. That’s the earnings that they’ll use to calculate your borrowing capacity.
If you only have a year’s accounts they will want a bit more paperwork. They’ll probably want to see three months’ business bank statements. If you’re a sole trader running things through your normal bank account, that’s fine as well.
They want to see money going in and a healthy bank balance. If you made £25,000 last year, for the last three months they’ll look to see that the money is on track for your second year. Sometimes they may ask for six months – so be prepared and make your account look as healthy as possible.
Do self-employed individuals with one year’s accounts have access to the same mortgage products and rates as those with longer accounts?
Absolutely. Everybody’s got access to the same rates – it all depends on your credit score and your deposit.
We have access to many lenders. We’ll source a product from a lender that accepts one year’s accounts – you will have the same access as anybody who’s employed. Although not many lenders will accept one year’s accounts, you have access to the same products and rates, as long as you fit the criteria for that lender.
What steps can I take as a self-employed individual to increase my chances of securing a mortgage with one year’s accounts?
Healthy bank statements are really important. They want to see you running your business. If you’ve only got one year’s records, you’ve got quite a lot to prove compared to somebody that’s been in business for two or three years. Keep paying the money in, make sure you’re not in an overdraft.
Lenders may ask you for projected figures from your accountant, or an accountant’s certificate. During Covid a lot of lenders brought this in – they now don’t want the tax calculations and tax year overviews, they want an accountant to fill in a certificate. But we still need tax records for compliance and to work out your borrowing.
Again, you need to document your previous experience if you’ve come from a similar background. If somebody’s gone from being a shop assistant to a self-employed builder, they’re going to struggle. We have to prove that you can sustain that income into year two.
How do lenders assess the affordability of a mortgage for self-employed individuals with one year of accounts?
When you submit to HMRC for self-assessment, you’ll input all your different figures including gross income. You might have taken in £45,000 but had £20,000 of outgoings.
You will be taxed on your net income of £25,000.
That’s where your tax calculation comes in. There are lots of boxes to fill in on your self-assessment and that’s why an accountant is helpful – they know what they’re doing. They know what they can use for expenses and outgoings. Once you’ve filled in all those boxes, you have a net figure – that’s the bit lenders assess you on.
Are self certification mortgages available for self-employed individuals with only one year of accounts?
No – those are gone. You can’t sell self-cert mortgages any more, to anyone, not just the self-employed.
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Are there any specific mortgage lenders or financial institutions that specialise in providing mortgages to self-employed individuals with one year of accounts?
Yes, there are a handful of lenders. There aren’t many, because it’s high risk. If you’ve been in business for one year you could have a really good first year. They’ll also look at what type of business it is. It might succeed for a year and then fall down because the market changes in the second year.
But there are lenders available. Don’t get disheartened. You might walk into a bank and they say that two years’ accounts are needed. Talk to a broker, as usually you’ll only get these deals through us. We can package your case to get a one year account mortgage.
Are there any additional criteria or considerations that self-employed individuals with one year’s accounts should be aware of when applying for a mortgage?
The type of job is important, and so is having previous experience. One thing to highlight is the CIS Construction Industry Scheme, where you are classed as self-employed but you pay 20% tax at source. You get a payslip every two weeks – or a voucher, as they call them.
A few lenders, who again work through brokers, will accept a CIS contractor who has only been doing it for 12 months. We just average out the earnings.
Other contractors can be different, too. As long as you’ve got a contract, perhaps you’re six months into it and you’ve already been guaranteed next year’s contract, you don’t necessarily have to have two years’ accounts. More lenders are open to those.
How long does the mortgage application process usually take for self-employed individuals with one year’s accounts?
It’s no different, really. Lenders can ask for more paperwork, but as the broker I will preempt that on application. We will need three months’ business bank statements and three months’ current account statements. Let’s get all the information we possibly can so it’s there, ready to submit.
We know what the underwriter is going to ask for, so it’s about being organised . If it’s packaged well, the underwriter can understand the case. We can explain things. If a builder that’s self-employed has previously done three years work in that job, I can confirm that and provide the supporting documents.
With that preparation, there’s no reason why it can’t be as quick as a regular mortgage for an employed person.
Is it beneficial to work with a mortgage advisor or broker when applying for a mortgage as a self-employed individual?
Brokers are usually the only route to a mortgage with one year’s accounts. Lenders need us for that packaging. It’s all about being organised.
Over the years I’ve seen people who don’t think I can help them. They’ve spoken to a couple of lenders who turned them down and assumed it’s not possible.
Go to a broker – this is what we specialise in. We have the criteria and the knowledge of many, many lenders. So, where you can, work with a broker.
Can I apply for a joint mortgage with a partner who has a regular income even if I am self-employed with one year of accounts?
Yes – and it can work two ways. If you need both people’s income for the borrowing you need, we need to go to a lender that will accept one year’s accounts.
But it could be that your partner earns enough, and you just want to be on the mortgage. You can go to any lender and just be named on it. We don’t have to use your income. It all depends on how much you want to borrow and what your income is.
Are there any specific challenges or risks that self-employed individuals face when applying for a mortgage with one year’s accounts?
Yes – the main challenge is that there are limited lenders. I could probably count on one hand the high street lenders that will take one year’s accounts. Those lenders also come with other criteria that you have to match.
You might meet affordability for one lender but they might not accept one year’s self-employment. Then a lender that accepts one year’s self employment might not let you borrow enough. It can be a challenge, but that’s why you come to a broker.
What happens if my one year accounts show low or fluctuating income? Can I still qualify for a mortgage?
Potentially – it all depends on how much you want to borrow. As a broker, I would be prepared for questions from the underwriter. As long as it fits on affordability and you’ve got the right credit score for that lender, you should get through.
They may come back and require an explanation – as long as it’s plausible they’ll be fine. I would be prepared with business statements and bank statements. You might be a self-employed person that has big costs in one month, then you don’t get paid much for a couple of months. As long as there’s a reasonable explanation and it’s affordable, it will work.
On low incomes, some lenders have a minimum income of perhaps £15,000. If your earnings are under that, we might struggle unless you’re applying with somebody else. It doesn’t cost anything to find out, if you’re unsure.
What impact does credit history have on the mortgage application process for self-employed individuals with one year’s accounts?
It’s very similar for one year’s accounts as for somebody on the payroll. The lower your credit score and the lower your deposit, the higher the risk to the lender.
If you’ve only got a 5% deposit, you will need to have a high credit score to pass. The bigger the deposit, the lower the risk and the more likely you are to pass the internal credit scoring.
Are there any government schemes or support available to assist self-employed individuals with one year of accounts in getting a mortgage?
No, there aren’t, I’m afraid.
Are there any alternatives to traditional mortgages that may be more suitable for self-employed individuals with one year’s accounts?
Not to my knowledge. If you’re buying a house, the mortgage is secured against the property. You’ve always got to prove affordability and income.
The only alternative is going down the route of a specialist lender. We have high street lenders and ‘subprime’ lenders. The high street lenders are where we aim for, because they have the better rates. Then we have a handful of lenders that will allow us to submit one year self-employed.
Of the sub-prime lenders, only a few will accept you, but they might be a bit more lenient in how they look at your one year of self-employment. Most lenders will look for a history – because the last thing they want to do is repossess your property. They want to make sure that it’s affordable and sustainable.
That’s why they don’t just hand out mortgages willy-nilly. So there aren’t many alternatives to a traditional mortgage.
Can I use additional sources of income such as rental income from properties or dividends when applying for a mortgage as a self-employed individual with one year’s accounts?
Yes, you can. If you’ve got rental properties, not all lenders will take this income. You will need to have submitted to HMRC on self-assessment for your rental income with ‘land and property’ on that tax calculation.
It’ll confirm the profit from your self-employment, profit from dividends, profit from PAYE and profit from land and property. All your different incomes will show on that. You will need two years’ rental income.
With limited companies, they are probably going to want a little bit more. If you’ve been a sole trader and have gone to a limited company where you’re taking PAYE and a dividend, many lenders will accept that. It’s just having proof of history on the sole trader side.
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