How will lenders assess my income?
No two lenders will use identical assessment criteria to work out your income figure. Some lenders have rigid underwriting criteria, while others may be more flexible. However, there are some common factors in how lenders tend to assess mortgage applications from self-employed applicants:
If you are registered as self-employed with HMRC on a sole trader basis, lenders will look at your trading history to assess your level of sustainable income. As evidence lenders may 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 may assess income based on your full trading accounts (as with sole traders). They may also take 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. They may require full trading accounts or SA302s to assess your income based on the salary you have drawn from the company.
Some lenders will also take dividends you have drawn into account. A less common approach is to calculate income 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.
Like sole trader mortgages, lenders will consider how long you have been a contractor and may want to see your accounts and/or SA302 calculations from HMRC. However, it’s common for specialist lenders to calculate an income figure based on the day rate shown on your current contract. This is 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 registered under HMRC’s Construction Industry Scheme (CIS), you may find 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. They will also consider how long you have been working with the same contractor, or in the same industry.