Self-Employed Mortgage First Time Buyer
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Self-Employed Mortgage First Time Buyer
Adam Messer talks us through how to go about getting a mortgage if you are a First Time Buyer and self-employed.
Can I get a mortgage as someone who is self-employed and a First Time Buyer?
Yes, absolutely. We love self-employed mortgages. There are so many different options when you’re self-employed that it can be quite a scary prospect, I suppose.
When you’re self-employed, you know about your business but you don’t necessarily know the intricacies of how your accounts and your income works – that’s why you have an accountant.
So it can seem a little bit daunting going to a lender and asking how much you can borrow when you don’t necessarily know exactly how your income is made up. But that’s where we come in.
You can definitely get a mortgage if you’re a self-employed First Time Buyer and there are many lenders to go to depending on what you do and how you are self-employed. We’ll talk about limited companies and sole traders shortly.
How does getting a mortgage work for someone who is self-employed and a First Time Buyer work? Is it difficult to get a mortgage when you are a self-employed First Time Buyer?
The main thing is your income. We’re going to ask for different income evidence depending on the lenders. Their rates and affordability criteria are mostly the same.
There’s a bit of a hangup from Covid times where some lenders are a bit less generous for self-employed people, because they were the worst affected during the pandemic. But most of that’s gone now.
Whether you’re employed or self-employed, the amount you can borrow and the value of property you can buy will be the same. We’re just going to ask for different information.
If you’re a sole trader we will ask for your last couple of years’ net profit figures and for documents you get from HMRC that break down your income. Those will help us work out how much you can borrow.
Usually you need two years’ records, but a few lenders might look at just your first year. If you’ve only got one year’s accounts, we’ve done a podcast on that you can enjoy at your leisure.
It’s not difficult. It’s just different. We’re just going to ask for certain figures that you may know and your accountant will certainly know. Once we’ve got those we’re all good.
How many years do you have to be self-employed to get a mortgage?
Mostly it’s two years’ figures and lenders will average the last two years’ profits. We’re always going to use the latest year’s figures if your income has gone down. If performance has gone up, most lenders are going to average the past two years.
If you’ve only got one year’s figures, there are lenders we can go to. It depends a bit on what you’ve done before. If you’re an employed electrician, for example, and you become a self-employed electrician doing the same thing – you might even subcontract for the same company – that’s going to be fairly easy as long as your credit score is OK.
But if I suddenly decided to be a self-employed electrician I might struggle – lenders might think I don’t know what I’m doing, and they’d be right. But you can potentially get a mortgage with one year’s figures. People often think you need three years’ accounts, but that only applies with one or two lenders. Most are happy with two.
How much can I borrow for a mortgage if I’m self-employed and a First Time Buyer?
A couple of lenders do ask if you’re self-employed or not and they’re not as generous if you self-employed. There are good years and bad years when you’re self-employed, compared with someone that’s employed and just earns a set amount of money.
It’s no safer being employed, but that’s a different story. How much you can borrow is basically the same. Very broadly we say you can borrow four and a half times your income, but it will depend on other factors like other debt, loans, credit cards or other income you might have.
If you’ve got a limited company it might be slightly different as well. Some lenders might use your profit instead of your dividends. Again we’ve got a section on the site about limited companies where you can find more details.
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How is a mortgage calculated for self-employed First Time Buyers in the UK?
Very much the same way as for anyone else. Generally speaking, mortgage rates and borrowing are calculated in the same way. You’re not going to pay a higher mortgage rate just because you’re self-employed.
Affordability is calculated by looking at your net profit if you’re a sole trader or you’re in a partnership. If you are a limited company director we’re going to look at your salary and dividends, first off, but some mainstream lenders will look at your salary and your net profit. Or even your gross profit in some cases.
There are lots of different options around which income is best to use. Some lenders are better than others.
For example, a company might make £100,000 in a year but as director, you only pay yourself £50,000. Most lenders will calculate your lending on your salary and your dividends at £50,000. But if we go to a lender that looks at your retained profit in the business, the amount you can borrow is based on that £100,000 – so essentially, your income amount has doubled.
That can make a massive difference to some people. Not everyone will leave the extra £50,000 in their business. Most people will take most of what they can out, but in some cases this approach makes sense.
What documents do I need to prove my income if I’m a self-employed First Time Buyer?
It depends how your business is set up. If you’re a sole trader we’re going to need your SA320 or tax calculations.
When you fill in your tax return, or your accountant does, you’re going to get a summary page detailing your income and the tax liability. That’s the SA302 and it’s the main document lenders want. They might also ask for a ‘tax year overview’ that shows if you’re up to date on your tax.
If you own a limited company we might ask for your accounts as well. We’ll do that to work out your net profit and see if we should approach a lender that looks at net profit instead.
What if I have bad credit as someone who is self-employed and looking at my first mortgage?
The same rules apply as for anyone else. Again, we’ve got content on the website about bad credit, and it depends how bad it is. The odd little blip, being late paying your credit card a year ago probably won’t have much effect.
If you’ve got three defaults and two CCJs and none of it is settled, you probably aren’t going to be very successful.
The key thing is to download a copy of your credit file – we recommend a Checkmyfile free trial. Then we can see exactly what’s on your credit report, as lenders will do different things. Some ignore minor indiscretions and some don’t. It’s quite a bespoke thing when you’ve got a little bit of bad credit in the background.
How can I improve my chances of getting a mortgage as someone who is self-employed and a First Time Buyer?
There’s a point to note here about how you run your accounts. Until you’ve looked at getting a mortgage, you probably take all your income and expenses and celebrate that your accountant has managed to reduce the income down so you pay less tax.
But that’s not such a great thing when it comes to borrowing – because you only pay tax on your income or your profit. If you’re not paying much tax, your profit is low – so you can’t borrow much.
It is important that if you know you are going to want to secure a mortgage in the near future that your accounts look as healthy as possible.
How do I apply for a mortgage as someone who is self-employed and a First Time Buyer? How can a mortgage broker help?
There are so many different options, so speak to a mortgage broker. A comparison site is not going to give you the most suitable rates. Going to your bank – even if you have a business account with them – is not going to give you an idea of what other lenders will do.
When you’re self-employed, some lenders are much better than others for your income or affordability. A mortgage broker is going to know that, whereas Google won’t. We’re going to know exactly which lenders to go to and which ones to avoid.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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