Can You Get a Mortgage If Your Self-Employed Income Has Dropped?

Self-employed income naturally fluctuates, especially for contractors, freelancers, sole traders and limited company directors. Seasonal changes, market shifts, contract loss, illness or strategic business reinvestment can all cause a decline in profit. So what happens when you need a mortgage at the same time your income is lower than in previous years?

The good news is that many lenders will still consider a mortgage if your self-employed income has dropped, but their assessment becomes more detailed. Lenders want to understand why income has reduced and whether the lower level represents a temporary dip or a new long-term trend. This article provides general information only and does not offer regulated mortgage advice.

---

Do Lenders Allow Mortgages When Self-Employed Income Has Dropped?

Yes — it is often possible, but lender appetite varies depending on:

• The size of the drop
• The cause of the drop
• How stable your income now is
• Whether the business is recovering
• The documentation available

Some lenders are flexible with small or one-off dips, while others require a consistent upward or stable trend.

---

Why Lenders Focus on the Most Recent Income Figures

Lenders need confidence that the income you use to support the mortgage is sustainable. If they see a downward trend, they typically:

• Use the most recent year’s lower figure for affordability, and
• Ignore previous higher years

This can reduce borrowing capacity, but not necessarily prevent approval.

---

How Lenders Assess a Mortgage Application When Income Has Dropped

1. Examining Multi-Year Accounts

Lenders usually look at:

• 2 years of accounts (minimum for most)
• 3 years of accounts (preferred by some)
• SA302s or tax calculations
• Full company accounts (for directors)

If income has dropped, they focus on Year 3 (the most recent).

---

2. Basing Affordability on the Lowest Year

Most lenders assess:

• Latest year only, or
• A reduced average if the drop is modest

If income has fallen sharply, the lowest year will almost always be used.

---

3. Asking for an Explanation

Lenders often request:

• Accountant commentary
• Notes on why income dropped
• Evidence of recovery
• Proof of future contracts or pipeline work

A clear explanation helps reduce perceived risk.

---

4. Reviewing Bank Statements for Current Performance

Statements help lenders confirm:

• Whether current trading aligns with accounts
• Cash flow stability
• Reduced reliance on personal or business overdrafts
• Consistent client or customer payments

Good bank conduct is a strong compensating factor.

---

5. Looking at Industry and Business Type

Some sectors naturally fluctuate — such as construction, consultancy, coaching, contracting and creative work. Lenders familiar with these industries may be more flexible.

---

How Income Type Affects Assessment

Sole Traders and Partnerships

Affordability is based on taxable profit.
If profit drops, affordability drops.

---

Limited Company Directors

Lenders may use:

• Salary + dividends, or
• Salary + net profit, or
• Salary + retained profit (specialist lenders)

If the most recent profit is lower, borrowing may reduce.

---

Contractors

Day-rate lenders may:

• Use your contract value rather than accounts
• Accept income even if the previous year was lower
• Focus on contract continuity rather than historic performance

This can be helpful during temporary dips.

---

Common Reasons for Falling Self-Employed Income – and How Lenders Respond

1. Loss of a Major Client

Lenders want reassurance that the business has replaced or will replace the lost revenue.

---

2. Illness or Time Off Work

If trading has resumed and current income is strong, lenders may take a balanced view.

---

3. Business Investment

Lower profits from reinvestment may still be acceptable if turnover remains strong.

---

4. Market Downturn

Sector-wide dips are viewed differently from issues unique to one business.

---

5. Seasonal Variation

Lenders may consider multi-year averages if seasonality is consistent.

---

Can You Still Get the Mortgage Amount You Want?

Possibly, but it depends on:

• The size of the drop
• The loan-to-value (LTV)
• Your credit profile
• Bank statement conduct
• Strength of current trading
• Alternative lenders available

If borrowing at the desired level is not possible based on the latest year’s figures, options may include:

• Using a specialist lender
• Waiting for the next trading year if income is rising again
• Reducing loan amount
• Increasing deposit
• Applying through a lender that uses retained profit

---

How to Strengthen Your Application When Your Income Has Dropped

(General Information Only)

Borrowers often take the following steps:

1. Prepare a Clear Explanation of the Drop

An accountant’s letter or a written summary helps underwriters understand context.

---

2. Show Evidence of Recovery

Recent bank statements and invoices demonstrating increased activity are useful.

---

3. Keep Credit Conduct Strong

Avoid late payments, overdrafts, or new credit during the application period.

---

4. Ensure Documentation Is Up to Date

Provide:

• Full accounts
• Tax calculations
• Company financials
• Contracts or pipeline evidence
• Business bank statements

---

5. Reduce Personal or Business Debt

Better affordability helps offset the risk of reduced income.

---

6. Consider a Lower LTV

More equity increases lender choice and reduces scrutiny.

---

7. Choose Lenders Experienced With Fluctuating Self-Employed Income

Some lenders use manual underwriting, providing more flexibility with declining income.

These are general considerations only.

---

Typical Scenarios and How Lenders Respond

Scenario 1: Income dipped slightly but is stable

Some lenders may still average income over two or three years.

---

Scenario 2: Income dropped significantly year-on-year

Most lenders will base affordability on the lowest figure.

---

Scenario 3: Income dropped due to illness but has recovered

Lenders may accept if you can show current trading is back to normal.

---

Scenario 4: Limited company retained profit is high despite lower dividends

Specialist lenders may allow retained profit to boost affordability.

---

Scenario 5: Contractor with reduced accounts but strong ongoing contract

Contract-based underwriting may override the lower income year.

---

Summary

It is possible to obtain a mortgage if your self-employed income has dropped, but lenders assess these applications more cautiously. They typically:

• Base affordability on the most recent lower year
• Request additional documentation
• Evaluate bank statements carefully
• Consider explanations and sector-specific context
• Use manual underwriting for more complex cases

A drop in income doesn’t prevent mortgage approval — but it may limit borrowing capacity or lender choice.

This article provides general information only. For personalised support, regulated mortgage advice is required.