What Income Do Mortgage Companies Look for When Self-Employed

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What Income do Mortgage Companies look at if you are Self-Employed? 

Getting a mortgage for the self-employed is easier than ever, as long as you have the right documents to prove your income. Find out why proving income is so important and how to improve your chances of approval.

What counts as being self-employed?

From a mortgage lender’s perspective, you are a self-employed worker if you own more than 20% of a business that provides your main income.

You could be a Sole Trader, contractor, in a partnership or the director of a Limited Company. The setup of your company can make a difference in how a lender wants you to prove your income.

Why do I need to prove my income?

Your income is the basis of how a mortgage lender calculates how much you can borrow – so it’s a vital piece of information. Generally you can borrow around four to five times your annual earnings. 

Of course, self-employed people can see their income fluctuate over the course of a few years, which is why mortgage companies like to look at two or three years of business records. That way, they get a better understanding of your average income.

Proving your income usually involves sharing financial documents with the lender, such as business accounts, self assessment records and business and personal bank statements. Lenders also look at your credit score to check for any debt problems – these records go back six years. Small issues like delayed payments on credit cards don’t usually pose a problem.

Proving your income as a Sole Trader

For Sole Traders and partnerships, there’s no separation between your business and your personal finances. Lenders usually request one to three tax years of self assessment records. These SA302 forms state your annual income, and you can download them from the HMRC website. 

Proving your income as a Company Director

A Limited Company Director usually provides certified accounts for the last one to three years. You might also need to supply P60 forms or tax calculations. 

Note that lenders can have different approaches to defining income for a Limited Company Director. Some will only accept your stated salary – which is a challenge if you pay yourself a low amount to keep your tax down. Others will also accept dividends and certain specialist lenders will also look at the net profit in your business, often meaning you can borrow more.

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Proving your income as a Contractor

Some lenders will view a contractor as a sole trader or a Limited Company, while others may have special criteria for Contractors. Such lenders may accept your day rate as the basis for their affordability calculations – which means you can borrow more, as this is gross income not post-tax profit.

Contractor mortgages sometimes set a minimum requirement for stable income, which is often two years. You will need to supply details of current and previous contracts. 

Do Self-Certified Mortgages still exist? 

In the past, self-employed mortgage applicants would need to take out a Self-Certification Mortgage to buy a property. This type of mortgage deal required no proof of income – borrowers just signed to confirm their annual earnings. 

These mortgages were banned by the Financial Conduct Authority more than a decade ago, in the wake of the credit crunch. Since then, financial providers have had to check that every customer can afford to repay their loans – which is why we need to prove income.

How do I get a mortgage when I’m self-employed?

Getting a self-employed mortgage follows the same process as for an employed person. You start by finding out how much you could borrow, by seeing a Mortgage Broker or using a mortgage calculator. Check that the repayments on your mortgage will be affordable, and if so, you can set your property budget.

You can then gain an Agreement in Principle from a mortgage company, which is a statement confirming how much they are prepared to lend you. By having an Agreement in Principle you are a more credible buyer, so a vendor is more likely to accept your offer on their property.

Next, you progress with the mortgage application and provide your proof of income documents. As long as you meet all the criteria, the mortgage should go through.

How do I improve my chances of my mortgage application being approved?

Getting mortgage approval is basically a question of meeting all the lender’s criteria. These cover many details, from your credit rating to details about the property you are buying. 

One of the advantages of choosing a Mortgage Broker like First Thought Financial Services is that we will do all the research to make sure you meet the criteria before you apply. We’ll support you with applying for a mortgage and help you get all the documents together.

Call us today for a free initial consultation.


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