Self employed income calculation for mortgage

halkineso

Hi. I'd like to find out how banks calculate self employed income. I know they want to see 3 year tax returns and they look at profit after expenses.

But lets take this example and lets say last three year I've earned 10k, 30k, 50k. So they take 90k and divide it by 3 which comes to 30k annual income? Or they use different calculation method and the year when I've earned only 10k gonna cause some problems?

Thanks in advance

ACG

Most lenders now work off an average of the last 2 years. 
It would be your income after expenses but before tax. 

So in the example you gave, it would be £30k + £50k / 2 = £40k. 
Some lenders will work off latest years figures.

BUT there is usually a caveat, if your income has gone from £10k to £100k for example, they may question such a large jump. 

[Deleted User]

In your case you would either be £40k (average of 2 years) or £50k (latest years accounts used).

Lenders have different ways of calculating and its generally what makes a broker so worthwhile for self employed cases as the loan amounts can swing wildly when going to different lenders. As an example:

Sole Trader

Average of last 2 years with 3 years needed
Average of last 2 years with 2 years needed
Latest year if the average is declining
Latest years accounts if upward trend

Ltd Company

Dividends and Salary
Salary and Share of net profit after corporation tax  (average of 2 years or latest year)
Salary and share of net profit before corporation tax (average of 2 year or latest year)

And that's before we even get in to the specialist lenders who can bring deductions from accounts for tax purposes back in to income to increase the borrowing levels