Self Employed Mortgage First Time Buyer
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Self Employed Mortgage First Time Buyer
Can I get a mortgage as someone who is self-employed and a First Time Buyer?
Yes, absolutely. Being self-employed and being a First Time Buyer both come with their own challenges. Finding a mortgage when you’re self-employed is a challenge in itself, and if you’re a First Time Buyer attacking that on your own, again, that makes it more complicated. But we’re here to help you.
How does getting a mortgage work as someone who is self-employed and a First Time Buyer?
If you’re a First Time Buyer, the whole process is brand new to you. A lot of people get a bit confused about what they should be doing and how it works.
But it works exactly the same way as for anyone getting a mortgage. It’s based on what the lender is happy to lend you, looking at affordability and the evidence you can provide to them of your income, outgoings and whether you’ve had any bad credit.
If you’re self-employed it can certainly be more complicated, because of the way that lenders assess your income. They are all different in how they calculate affordability. If you’re employed, you just provide proof of your salary using a payslip. When you’re self-employed, there are a lot more hoops to jump through.
As a First Time Buyer, it’s not really difficult to get a mortgage, but if you’re also self-employed it’s more complex. Then, if you’ve had a few credit issues in the past, it’s going to be even more difficult. A lot depends on your circumstances.
How many years do you have to be self-employed to get a mortgage as a First Time Buyer?
This is one of the challenges. Typically you would need to have two years’ trading as self-employed – although some banks allow a minimum of 12 months.
To qualify for most mortgages, you would need two years because lenders take a longer term look at your income. Ultimately they’re taking more risk with you being self-employed, so they want to make sure that the level of income is sustainable.
If you are listening to this and you’ve only got 12 months, there is a possibility you can still get a mortgage, but ultimately two years is the magic number.
How much can I borrow for a mortgage if I’m self-employed and a First Time Buyer?
There are lots of different factors that are going to affect the answer to that question. One is how you are set up as self-employed – are you a sole trader, a limited company director or a partner?
The way you draw an income is going to be different depending on those factors. If you’ve been trading for one year, you may only have one or two lenders available to you. But if you’ve been trading for five years and your income is pretty steady, you can potentially borrow slightly because the lender is happy with the way your business is going.
How much you can borrow will also depend on how much deposit you’ve got and your financial commitments – such as paying car finance or high credit card balances. Your credit score is also important – whether you’ve missed payments before, for example.
Your age and how long you’re looking to take the mortgage for can also affect your borrowing. There isn’t a magic answer of four or 4.5 times your income – those are some of the maximum multiples that lenders use. But the real number will depend on lots of different factors – plus every bank and building society will then use their own methods to calculate what they’re happy to lend.
The best way to find that out is to either go directly to a bank and find out how much they’re willing to lend you – or even better, approach a mortgage advisor who has access to multiple lenders. We can do all those checks for you and let you know.
How is a mortgage calculated for self-employed First Time Buyers in the UK?
It depends on how you’re set up as a company – sole trader, limited company or a partnership. If you’re a sole trader, lenders will look at net profits. Typically they’ll take a two-year average. Some banks will use the latest year.
For a limited company, they may look at your salary plus your dividends. They may take an average, or they may look at salary and net profit, or profit after tax, or before tax. There are lots of weird and wonderful ways we can use your income and every lender is different.
The result you get from each lender can really vary.
This is where a mortgage broker can really come to the forefront. We can have a look at your accounts and work out which way is best to present you to the bank. It could be salary and net profit or salary and dividends. There’s many different ways we can look at it.
What documents do I need to apply for a self-employed First Time Buyer mortgage?
If you’re a sole trader or perhaps a partner in an LLP, usually you’ll need to provide an HMRC tax calculation. Once you’ve submitted a self-assessment tax return you’ll get a copy of that – it shows evidence of your total earnings from self-employment.
It will also include rental profit if you get that, or investment profit etc. The other document that couples with that is called a tax year overview, again that’s provided by HMRC when you do a self-assessment. You can download both of those yourself or get them from your accountant. Accountants will know exactly what you’re talking about – it used to be called an SA302 and some people still call it that.
If you’re a limited company director, some lenders will ask for your company accounts and use the figures there for turnover, net profit, corporation tax, director’s remunerations.
Obviously those two documents may not correspond exactly – one might be the fiscal year and one might be your company year. So there are different ways depending on the lender you’re approaching.
Some lenders are happy to use an accountant certificate or an accountant’s reference – a template form that your accountant can fill in. They will need to be fully qualified and registered.
You also often need to provide your business bank statements or for a sole trader, the account you use for your business income. They can then see that your business is still going in the right direction since your last tax return.
What if I have bad credit as someone who is self-employed and looking for my first mortgage?
Most of us have had the odd blip – we’ve discovered a CCJ or we’ve run into a few problems. But if you’re self-employed and a First Time Buyer, then we add bad credit into the mix, it is a challenge – there’s no denying that.
But the good news is there are quite a few banks that accept things like missed payments or a CCJ – or anything up to a bankruptcy. These are more specialist lenders rather than high street banks. So if you’ve got bad credit or a low credit score, it doesn’t mean you can’t get a mortgage.
It’s just a bit more of a challenge with a few more hoops to jump through. But using a mortgage broker will really help with that.
How do lenders calculate my income as a self-employed First Time Buyer?
The evidence you provide is the line. There are many different factors that will play into that.
How can I improve my chances of getting a mortgage as a self-employed First Time Buyer?
There are things here. Preparation is key – having your accounts or your self-assessments in order will save you a lot of stress. Check your credit file, and again this is something a mortgage broker can help with in terms of understanding your credit report.
We can also help with understanding your accounts. If you’re self-employed, it’s a real challenge to attack this by yourself because each bank assesses you very differently. Ultimately, you can come up with very different results.
A mortgage broker that has access to multiple banks and building societies will help you massively, particularly if you’re trying to get the borrowing that you need.
How do I apply for a mortgage as a self-employed First Time Buyer?
You either apply for a mortgage directly from a bank or building society, or through an intermediary like a mortgage broker. We research your options, get to understand your circumstances, gather all the evidence we need and understand what’s important. That way we can advise you on the way forward.
We compare the options from over 55 lenders across the market. Getting you the best deal as someone who’s self-employed is not always about getting the lowest interest rate or the cheapest deal.
It’s about making sure we’re providing you with the options you need. If your priority is to borrow more, we need to find the bank that will lend you the most. Or if you’ve been trading for two years but your first year was really low, you need a lender that’s going to look at your second year rather than an average of both.
These are the areas where a mortgage broker’s experience can add massive value – it means you might be able to get on the property ladder sooner than you thought. I’ve helped lots of clients who have been turned down by a bank, or haven’t quite got the mortgage amount they need.
Just have a conversation – you have nothing to lose, but you might gain quite a lot from just chatting with a mortgage broker to see what your options are.
Approved by The Openwork Partnership on 20/02/2024.
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Self-Employed Mortgage First Time Buyer (Part 2)
We continue the conversation on how the mortgage process works if you are self-employed and a First Time Buyer, with Lee Gathercole and Neezam Romjon.
Podcast approved by The Openwork Partnership on 17/12/2024.
Is there any flexibility in the repayment terms for self-employed individuals who are First Time Buyers?
If you’re employed, you’re going to be getting a salary on the same day every month for the same amount, which helps you plan for your monthly bills.But obviously being self-employed, your income might be sporadic, you might be getting paid invoices at different times and one month might be better than another. So I can understand where that question comes from.
From a mortgage perspective, lenders expect you to make a minimum payment every month. We work with you to understand your budget and what you can manage as a minimum payment. Then, if you have a good year or you have more income to use, you can pay your mortgage down quicker using an overpayment facility with your lender.
That means paying more than your minimum payment to pay your mortgage off faster and save on interest. That’s generally an option with a lot of lenders. Most deals out there will allow you to do that.
Just raise that with your advisor and make sure they’re aware of the minimum payment you can commit to.
What additional fees or costs should I be aware of if I’m a First Time Buyer and self-employed?
There’s not a huge difference. Obviously, we’ve got the usual ones across the board like a broker fee and solicitor fees. If you want to get a property survey, there could be some fees there to check the condition of the property.Specifically if you’re self-employed, most lenders will require documents like company accounts and your self-assessments from HMRC. If you need to obtain these documents from your accountant, you might have to pay to do that.
It’s worth planning ahead. If they’re putting your accounts together or you’re asking for a copy of your tax return, some accountants charge for this. Just be aware that this could create some additional costs for you.
Will I need a guarantor to get a mortgage if I’m self-employed and a First Time Buyer?
No, not just because you’re self-employed. But you might have a guarantor for another reason. We’d be looking at a Joint Borrower Sole Proprietor mortgage for that.You don’t need a guarantor just because you’re self-employed, though. The banks and building societies generally will carry out a full affordability assessment based on your income, your earnings and your business performance over the last two or three years.
They’ll ask you for lots of documents and do a thorough assessment to be satisfied they can lend you the amount you’re looking for.
Are there any government schemes available to help self-employed First Time Buyers?
It’s not specifically self-employed, but there are lots of schemes to help you get onto the property ladder as a First Time Buyer – and these are applicable to the self-employed. It’s a common misconception that you may be limited on schemes, but that’s not that case.You can certainly access things like the shared ownership scheme. With this, you can buy part of the property – it’s a great solution if you can’t quite get the borrowing you need for the full property value on a mortgage.
Also, 5% deposit mortgages are available for those who are self-employed. Various lenders allow you to purchase a property with little deposit. There are a lot of schemes. I’ll probably be here forever talking about them, but to reassure those who are self-employed, most schemes are available to you, subject to qualifying criteria [correct at time of recording in November 2024].
What if I have bad credit as someone who is self-employed and looking at my first mortgage?
It could really limit your options, depending on what that bad credit looks like. There’s a big umbrella – it could just be someone missing a credit card payment three years ago. They might define themselves as having bad credit because they don’t have the perfect credit score. At the other end of the scale it could be someone that’s just entered into a bankruptcy.Depending on the severity of that bad credit, there hopefully will be options available to you. There are lenders that will lend to self-employed First Time Buyers with bad credit.
Generally they’re looking for a period of at least six months or more where you’ve managed to get back on your feet. You don’t have any new missed payments or defaults on your credit report.
If we’re helping a self-employed First Time Buyer who has bad credit, we normally ask for a copy of your credit report. We’ll look through it to see where those limitations might be. Then we could dive into the options and confirm whether you will need to increase your deposit size and what kind of interest rates you’re looking at.
You might find that it’s still affordable and you want to move forward, or actually that the interest rates are a lot higher and it’s right to put things on hold for six months. We could review it again then to see if we could get you any more competitive deals.
I’m self-employed. Can I use profits or dividends as income for the mortgage application as a First Time Buyer?
Yes, you could use profits or dividends. If you have a limited company you probably pay yourself a salary and a dividend, and the good news is that most banks will take those.They take the figures for the latest year or the average of two years.
One other area could make the difference in you obtaining the borrowing you need. Some banks use salary and profit. That could be profit before tax, or profit after tax. That could be really helpful.
We could look at it two different ways. If you’re using a mortgage broker, they will be able to assist you in finding lenders who use profits and salary, and which would use salary and dividends, depending on what will present you in the best way.
There are lots of different variables, but we could select the most appropriate banks, explore all the options and see what you could borrow from many different angles within your business.
What impact does my business structure have on my mortgage application as a First Time Buyer?
The biggest impact is on how the bank will assess your income. If you’re a sole trader, usually you’ll file a self-assessment tax return with HMRC every year. That tax return will show the money that came in, and then after your expenses were deducted, how much net profit was left.Generally, that’s the figure that lenders use as your income, to calculate how much they’ll lend you. They’re looking for evidence of sustainability for that income over a period of time. They might ask for two years or or even three. Some will go slightly less.
If you’re in a partnership, it’s slightly different. Lenders will be looking at what that looks like – whether you own a 50% share or a 0.1% share in a big law firm or pension company.
Depending on the share you own, they will look at either tax returns or company accounts.
For a limited company, you’ve two options as we said earlier – you could evidence your salary and dividends, which will be on your tax return. Or, some lenders will look at your company accounts and net profit. So if you have £100,000 in net profit, but you’re only taking £50,000 to pay yourself, those salary and dividends will show £50,000.
Based on your company accounts and net profit, some banks might take £100,000 and, in theory, give you a much bigger mortgage. So the key difference based on your business structure is how much income you could use for your application. That will depend on the lender, the share you own and how long you’ve been trading.
Can business funds be used for the down payments on a mortgage for a self-employed First Time Buyer?
Yes, but there could be implications and the lender might ask more questions. There could be tax liabilities for you. You probably need to speak to your accountant if you’re considering something like that.But it could be done and some lenders could accept it. Lenders may want a letter from your accountant to state that this won’t have any detrimental impact on your business. The lender doesn’t want you to withdraw money from your business as a deposit that could end up being a big risk to you in future.
Can I still get a mortgage if I’ve been previously declined as a self-employed First Time Buyer?
The right thing you could do in that situation is be transparent. We often talk to people who have tried to get a mortgage – they’re self-employed, buying their first property and they’ve been declined.You don’t know where to go or where to turn – should you give up or explore alternative options? But we’re often able to help those people depending on the situation and the reason for the decline.
Sometimes it’s an error on the behalf of the previous advisor. Maybe they’ve just not matched you with the most suitable lender, or maybe you’ve gone straight to your bank and they’re not right for your circumstances.
The right thing to do is answer as many questions as you can from the advisor you’re talking to, so we could fully understand the whole situation. The last thing we want to do is see you get declined again. The more information we have, the better.
It could be your credit report or that your deposit is not enough. It may have failed affordability because your income wasn’t evidenced the way the lender wants. If we discover there are no lenders available to you right now, that will help you put a plan in place.
It’s not impossible forever. We could help get you ready to buy your first property. These are typical conversations we have with people.
How can a mortgage broker help? Have you got any final thoughts?
There’s no doubt that being self-employed comes with a lot of challenges. We’ve provided a brief overview, but there are so many variables when you’re self-employed – particularly around your income, what documents are needed and what additional costs you might incur.There could also be tax implications, although that’s more suited to an accountant. But a mortgage broker could help you overcome those challenges quite early. We help you plan ahead and get all your ducks in a row – because there is a little bit more documentation. Your application may be under a little bit more scrutiny than one from someone who’s employed.
A mortgage broker could help you get everything together, fully understand what you could borrow and support you at every step in buying your first home.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Approved by The Openwork Partnership on 17/12/2024.
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