How will lenders assess my income?
It’s first important to understand that no two lenders will use identical assessment criteria to work out your income figure for the purposes of calculating how much you can borrow. Additionally, some lenders have very rigid underwriting criteria, while others – particularly more specialist lending companies – may be more flexible. However, there are some common factors in how lenders tend to assess mortgage applications from self-employed applicants, and it usually varies depending on the exact nature of your employment. Typical approaches include:
If you are registered self-employed with HMRC on a sole trader basis, lenders will look to your trading history to assess your level of sustainable income. As evidence lenders will normally ask to see full trading accounts, either prepared by or certified by a chartered accountant. Some lenders will ask for your SA302 year-end tax calculations from HMRC, either instead of or in addition to full accounts. It’s common for lenders to ask for up to three years’ accounts or SA302s, but some more specialist lenders can make lending decisions based on as little as one year’s records.
If your self-employed trading basis is as a member of a partnership, then lenders will usually assess income based on your full trading accounts (as with sole traders) but also be taking into account the percentage of your stake in the partnership.
If you are the director of a limited company, many lenders use a similar approach to sole traders/partnerships in using full trading accounts or SA302s to assess the income based on the salary you have drawn from the company. Some lenders will also take into account dividends you have drawn. A less common approach, but one sometimes used by more specialist lenders, is to calculate an income figure based on your share of company profits. This approach can be advantageous where profits have been retained in the company structure rather than drawn as salary or dividends, typically for reasons of tax efficiency.
Similar to sole trader mortgages, lenders will take account of how long you have been a contractor for, and usually will want to see your accounts and/or SA302 calculations from HMRC. However, it’s common practice for some more specialist lenders to calculate an income figure based on the day rate as shown on your current contract, usually based on an assumption of working five days a week, over 48 weeks in the year (taking holidays into account).
If you work for a contractor that is registered under HMRC’s Construction Industry Scheme (CIS), you may find different lenders have different approaches to calculating income and affordability, with many assessing on a case-by-case basis. Typically, however, lenders will ask to see three to six months’ worth of payslips and calculate annual income based on the gross payments shown, also taking into account how long you have been working with the same contractor, or within the same industry.