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Self-Employed First Time Buyer (Part 1)

Diarmuid Phoenix explains how a self-employed First Time Buyer mortgage works.

Can you get a mortgage if you’re self-employed and a First Time Buyer?

Yes, you can get a mortgage as a First Time Buyer who is self-employed. The process can be a little bit more complex than it is for salaried employees, as lenders want to see clear evidence of your income and financial stability.

You don’t have a fixed monthly wage, so they tend to go back a little bit further than the typical three months’ payslips from an employed person. It can be a little bit trickier, but yes, it is possible.

How does getting a mortgage as someone who is self-employed and a First Time Buyer work? Is it difficult?

I wouldn’t say difficult, just perhaps a little more tricky. First of all, your finances need to be assessed. That’s usually by looking at your previous two years’ tax returns.

They don’t look at necessarily the whole tax return, just the SA302 or tax calculation, as they’re called these days. Then it’s your tax year overview, which is the receipt from HMRC when you pay your tax.

As with an employed person, they will typically want personal bank statements showing your income going in, but they may also ask for business bank statements.

The next stage is getting a Decision in Principle, which is the same for all mortgages, followed by the full mortgage application. Then, once you’re approved, the mortgage offer will come in, followed by the standard legal process: conveyancing, surveys, contract exchange and completion. The actual process isn’t hugely different – it’s just how your financials are assessed.

How many years do you have to be self-employed to get a mortgage as a First Time Buyer?

The standard is two years’ full accounts – the SA302s, tax year overviews and business accounts.

Some lenders will accept one year. If you’re newly self-employed and you’ve only got one full year behind you, some lenders will accept that year plus an accountant’s reference. That outlines what you’re projected to earn the following year.

It varies between lenders. Only a limited number of lenders will accept one year, but your mortgage advisor will give you guidance on that.

What types of mortgages are available for First Time Buyers who are self-employed?

Self-employed First Time Buyers are the same as employed people in that you can access all the same mortgage products. The main difference is how the lender assesses your income.

You can choose from fixed rates, tracker rates, variable rates, discounted, shared ownership or co-ownership if it’s Northern Ireland. All those types of products are available to self-employed people just as they are for employed people.

How much deposit will I need for a mortgage if I’m a First Time Buyer and self-employed?

It’s the same as for employed people – the minimum starts at 5% for residential mortgages.
You need 5% of the purchase price, depending on the lender. Having 10% to 15% will give you access to slightly better interest rates and more lender options.

If your income is irregular, as it often is for self-employed people, or if you only have one year’s accounts, lenders might actually ask for a larger deposit. So if you just have a year, that not only will restrict the lenders, but it could restrict the deposit and you might have to put down 15%, 20% or more.

How much can I borrow for a mortgage if I’m self-employed and a First Time Buyer?

Again, it’s lender dependent, but most lenders offer between four and 4.5 times your income. It depends on your financial situation. It’s not an exact science – each lender has their own affordability criteria to assess what you can borrow.

For example, they might use your average net profit over the last two or three years. If you’re a company director, you might use your salary and dividends, or it could be salary and the share of net profit for company directors and shareholders.

Existing debt such as credit cards with balances on them, personal loans and dependent children are factored in as well. That can all reduce the amount you can borrow – so all those things need to be considered.

What documents do I need to apply for a self-employed First Time Buyer mortgage? How do I prove my income?

It’s those SA302 forms, which are now called tax calculations, and the tax year overviews from HMRC. You can get those with your government gateway login, or from your accountant.

We also need your bank statements, starting with personal ones, but they may ask for business bank statements depending on whether you’re a sole trader or a limited company. It could be three to six months’ statements.

They may ask for the company accounts if you’re more than a 20% shareholder. If you hold less than a 20% share, they might accept you as employed. Accountants’ references are sometimes required with certain lenders, and we can request those.

How do lenders calculate my income as a self-employed First Time Buyer?

Lenders calculate income for self-employed First Time Buyers differently depending on how your business is structured. The lender’s goal is to assess how much you consistently earn and whether or not the income is sustainable.

Some businesses can be seasonal, for example, so they’ll assess you on an annual rather than a monthly basis. They look at net profit per annum and sometimes take an average of the last two or three years’ salary and dividends.

Some self-employed people work as contractors, in which case certain lenders might even take a multiple of your daily or weekly rate.

How can I improve my chances of getting a mortgage as someone who is self-employed and a First Time Buyer?

Get your self-employed accounts up to date. We occasionally come across people who submit their tax returns late and get fines and penalties. That’s never a good start when you’re looking to buy your first home.

Make sure you get it in before the deadline, because lenders will want to see up-to-date accounts. It’s not just a case of being able to submit what you already have, as they require up-to-date ones – so make sure you have that.

Accountants have a tendency to try to keep their client’s tax bill down within the regulations, which is fine on your pocket, but not so good when you’re looking to buy your first house.
Bear that in mind – by keeping that profit down, you could potentially reduce the level of borrowing you could achieve.

Also, make sure your credit file is in order. Use CheckMyFile or one of the credit reference agencies, if you haven’t already. Make sure you’ve got a decent deposit saved – as the lower the Loan to Value ratio or the higher deposit level you have, the better.

How do I apply for a mortgage as someone who is self-employed and a First Time Buyer? How can a mortgage broker help?

Speaking to a broker is always the first thing you should do. We know our way around the market. We know the criteria for each lender and we’ll be able to help you navigate through it in a much smoother and efficient way.

Everybody’s busy, with their jobs and their lives in general, and we’ll save you time. These things can be complex, so using an experienced broker will be invaluable to you.

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

The information contained within this article was correct at the time of publication but is subject to change.

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Self-Employed Mortgage First-Time Buyer (Part 2)

We continue the conversation on mortgages and self-employed first-time buyers with Diarmuid Phoenix.

Is there any flexibility in the repayment terms for self-employed individuals who are first-time buyers?

There can be some flexibility for self-employed first-time buyers, but it will depend on the type of mortgage and the lender.

Some lenders allow longer mortgage terms of up to 40 years for self-employed applicants to reduce their monthly payments, but it depends on the type of business you’re in. If you’re self-employed, you run your own business and it’s mostly administrative, they can be more relaxed on lending into retirement, for example.

Whereas if you’re a roofer and you want a mortgage up to age 75, they might take a slightly different view on that. Overpayments, payment holidays and interest-only options may also be available.

What additional fees or costs should I be aware of if I’m a self-employed first-time buyer?

There are several additional fees and costs beyond the deposit and standard mortgage repayments. Some are the same as for employed buyers, but a few are more relevant to self-employed applicants – such as accountancy costs.

An employed person won’t need the services of an accountant, but that’s one thing you’ll need if you’re self-employed and you’re going to buy your first home.

Higher mortgage fees can potentially be applied by brokers, too, due to the additional work required for self-employed mortgage applicants.

Will I need a guarantor to get a mortgage because I’m self-employed?

Not necessarily. Being self-employed doesn’t automatically mean you’ll need a guarantor for a mortgage. Whether a guarantor is required will depend on a number of things, such as your income, your deposit amount and the lender’s risk assessment.

A guarantor might be needed if the applicant has a low deposit or fluctuating income – which is common with the self-employed. Previous credit issues or a limited trading history could also be overcome with a guarantor.

Are there any government schemes available to help self-employed first-time buyers?

Yes, there are schemes available for first-time buyers designed for self-employed applicants the same as employed applicants. That might include schemes such as co-ownership – or shared ownership in England. The mortgage guarantee scheme is another example.

What if I have bad credit as someone who is self-employed and looking at my first mortgage?

It’s going to be more challenging, obviously, but not insurmountable. Fewer lenders will lend to people with poor credit, whether they’re employed or self-employed.

There will be higher interest rates, and you may have to look at lenders that will accept the additional risk of impaired credit history.

I always urge people who fall into this category to check their credit report first. Gather as much income evidence as possible as sometimes lenders ask for longer income records. Use a broker to do this – we’ll source the right lender for you and give you the right guidance on how to do all that.

Can I use profits or dividends as income for the mortgage application?

If you’re self-employed, lenders typically allow you to use both profits and dividends as income on your mortgage application. Some lenders usually look at net profits after business expenses, while others look at dividends plus salary.

Some even allow salary plus your share of the company profit, if you’re a limited company director.

What impact does my business structure have on my mortgage application as a first-time buyer? Are there specific requirements for different structures?

Yes. Sole traders will be typically asked for two to three years of SA302s – which is the older name for tax calculations. We also need your tax year overview, which is basically the receipt when you pay the tax.

For partnerships, it’s similar. You’ll need the SA302s and the tax year overviews as well. They may possibly ask for partnership accounts to go along with that.

For limited company directors, they’ll still ask for the SA302 tax year overview and tax calculation combination, but they may also do a check on Companies House or even ask directly for the limited company accounts to see if the company is profitable.

There can be situations where a director is paying themselves well from the limited company, but the company has been making a loss over the last two or three years. If a director is paying themselves dividends, lenders might want more evidence of those – usually via the minutes of board meetings.

Can business funds be used for the down payment on a mortgage for a self-employed first-time buyer?

Possibly, but it depends on how the funds are used and documented. Lenders also treat this differently depending on whether or not you’re a sole trader, a partner or limited company director.

There may also be tax implications. So it’s important not only to consult your mortgage adviser, but also to take advice from your accountant before making any decisions.

What if I’ve been previously declined for a mortgage as a self-employed first-time buyer? What happens next?

Being previously declined for a self-employed mortgage doesn’t automatically prevent you from getting a mortgage as a first-time buyer. It can make the process more challenging, though.

Again, check your credit report. The reasons for the decline, such as missed or late payments, defaults and things like that, may have actually fallen off your record. Six years is the timeframe for that.

If you haven’t used an adviser, a mortgage decline might have been caused by an anomaly or a mistake, something that could have been overcome at the time with a different lender or product. That’s why it helps to speak to an adviser who’s experienced in dealing with these matters.

How can a mortgage broker help? Do you have anything else to add?

Speaking to a broker is always the first thing you should do. We know our way around the market. We know the criteria and we can help you navigate through more smoothly and efficiently than doing it yourself.

Key Takeaways:

Flexibility in repayment terms for self-employed first-time buyers depends on the mortgage type and lender, with some offering longer terms up to 40 years.
Self-employed first-time buyers should be aware of additional fees like accountancy costs and potentially higher mortgage broker fees due to the extra work involved.
A guarantor is not always necessary for self-employed individuals, but may be required if there’s a low deposit, fluctuating income, previous credit issues, or a limited trading history.
Government schemes for first-time buyers, such as co-ownership/shared ownership or the mortgage guarantee scheme, are available to self-employed applicants.
Mortgage brokers can help self-employed first-time buyers navigate the market, understand criteria, and find suitable lenders, especially if they have bad credit or have been previously declined.