Self-Employed Mortgage: When One Year's Accounts and Adverse Credit Complicate the Application

Sometimes securing a mortgage isn't about finding the lowest rate on a sourcing system. It's about understanding exactly which lenders are prepared to look beyond the obvious complications and assess the overall case.

This case involved a couple purchasing their next family home. On the face of it, the borrowing requirement was reasonable, but there were several issues that significantly reduced the number of lenders available to them.

The clients

Our clients were selling their existing home and purchasing another property using the equity from their sale as their deposit.

One applicant was employed, while the other had only recently become self-employed and had one year's trading figures available.

This immediately made lender selection more difficult. Many lenders prefer two or more years' evidence when assessing self-employed income, particularly where the income history is still developing.

But that wasn't the only complication.

The challenge

There were three significant issues that had to be considered together:

Short self-employed history Only one year's self-employed income was available for one applicant, meaning lenders requiring a longer trading history were unlikely to be suitable.

Historic adverse credit The other applicant had a default recorded on their credit file, further reducing the number of mainstream lenders available.

Recent utility payment history An Anglian Water account was showing six months' arrears on the credit file. The clients disputed the reporting and supplied correspondence indicating that Anglian Water had agreed to amend the credit record following confusion surrounding the account.

Even where there is an explanation for adverse information, a lender's automated credit assessment may still react to what is actually showing on the credit report at the time of application.

Why automated sourcing wasn't enough

This was a case where simply entering the clients' circumstances into a mortgage sourcing system wasn't sufficient.

We undertook extensive manual lender research and discussed the circumstances directly with lenders.

Aldermore Mortgages was initially approached but the application could not proceed because of the adverse credit position. Precise Mortgages was also considered but did not provide a viable route at Decision in Principle stage.

The challenge was therefore to identify a lender prepared to consider all three elements together:

• one year's self-employed income;
• an historic default; and
• recent adverse reporting on a utility account.

Our standard sourcing research did not initially identify Pepper Money as the obvious solution. However, further manual research and direct discussion with Pepper Money's underwriting team established that they had an appetite to consider the application.

That direct lender dialogue proved crucial.

The solution

Following our discussions with Pepper Money, a Decision in Principle was obtained and the full mortgage application was submitted.

The self-employed income was supported using HMRC documentation and bank statements. During underwriting, Pepper Money wanted to reconcile the income declared to HMRC with the income visible through the applicant's bank accounts.

Additional statements were therefore supplied to demonstrate the income receipts.

We also provided the underwriter with the background to the Anglian Water account and the correspondence confirming that the reporting was being amended.

The application then successfully passed underwriting.

The valuation

Pepper Money instructed its own mortgage valuation.

The property was initially being purchased for £416,500, and the valuer confirmed the property at the full £416,500 market value.

Although some maintenance repairs were noted, the property was considered satisfactory for mortgage purposes and suitable security for the lender.

With underwriting and valuation satisfied, Pepper Money issued the mortgage offer.

Then the property chain became the problem

Securing the mortgage wasn't the end of this particular story.

The clients became caught in an exceptionally difficult property chain. Problems affecting their buyer repeatedly delayed the transaction and meant that the original Pepper Money mortgage offer could not be used within its normal validity period.

We negotiated with Pepper Money to keep the mortgage offer alive rather than immediately putting the clients through another complete mortgage application.

Several extensions and amendments followed as the transaction continued to evolve.

Eventually, a new buyer was introduced and the financial structure of the transaction changed.

The purchase price of the clients' new home was renegotiated to £399,000.

Restructuring the mortgage

The revised purchase price meant the mortgage also needed to be reconsidered.

The Pepper Money product permitted borrowing of up to 80% loan-to-value.

On a £399,000 purchase:

£399,000 × 80% = £319,200

However, lender fees of £1,510 were being added to the mortgage and also had to remain within the 80% LTV ceiling.

This meant the net amount available towards the purchase was:

£319,200 – £1,510 = £317,690

The revised structure therefore provided a net mortgage advance of £317,690, with the clients providing the remaining purchase funds from their available equity.

Pepper Money reassessed the amendment and issued a revised mortgage offer.

The outcome

After a transaction lasting far longer than anyone originally anticipated, the clients finally exchanged contracts with a confirmed completion date.

What initially appeared to be a straightforward home move had required us to deal with:

• a newly self-employed applicant with only one year's figures;
• historic adverse credit;
• six months' adverse utility payment reporting;
• declined lender approaches;
• manual lender research;
• direct discussions with specialist underwriters;
• additional income verification;
• repeated mortgage offer extensions;
• a changing property chain;
• a revised purchase price;
• a revised mortgage amount; and
• further underwriting before the final offer could be issued.

The mortgage itself was only one part of the job. Keeping the transaction alive as circumstances changed became equally important.

What this case demonstrates

A short self-employed history or imperfect credit record doesn't necessarily mean that a mortgage is impossible.

But it can mean that lender selection becomes considerably more important.

Automated sourcing systems are useful, but complex cases sometimes require an adviser to go further: manually research criteria, speak directly with lender underwriting teams, understand how individual credit issues will be treated and present the application in a way that gives the lender the information needed to make a decision.

It also demonstrates why obtaining a mortgage offer isn't always the end of a broker's involvement.

When a property transaction becomes delayed or changes significantly, the mortgage may need to be renegotiated, extended or re-underwritten to keep the purchase alive.

For these clients, persistence eventually paid off: after months of uncertainty, contracts were exchanged and their purchase was able to proceed.

Could this apply to you?

If you're self-employed with only one year's accounts, have recently increased your income, or have historic or recent credit problems, don't assume that a declined Decision in Principle means every lender will reach the same conclusion.

Mortgage321 specialises in manually researching complex mortgage cases where the circumstances don't fit neatly within standard high-street lending criteria.

Every case is different and lender criteria can change. A previous successful outcome does not guarantee that the same lender or mortgage will be available in another case.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.