Self Employed Mortgage First Time Buyer
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Self Employed Mortgage First Time Buyer
Joanne Markham explains how self-employed mortgages work if you’re a First Time Buyer.
Podcast approved by The Openwork Partnership on 6/6/2024
Can I get a mortgage as someone who is self-employed and a First Time Buyer?
The simple answer is yes you can. The same mortgages are available to the self-employed and employed. Over the years people have been nervous of the barriers to self-employed people, but just come to a broker. It’s absolutely fine.
How does getting a mortgage as someone who’s self-employed and a First Time Buyer work? Is it more difficult?
It has been difficult, especially through Covid, and there are still a couple of lenders that have extra checks in place.
In terms of how it works, it’s the same process as for somebody who’s employed. Lenders just use the income in a slightly different way. It’s not difficult – and certain lenders are better than others. A good broker knows where to go to make life easier.
How many years do you have to be self-employed to get a mortgage?
You’ve got to have been trading for at least one year. If you go to a high street lender, they all want at least two years’ self-employment and some ask for three years’ history.
As brokers we have a small number of lenders that allow us to look at one year of accounts, and they will really look at your background. Let’s say, for example, that I was employed as a mortgage advisor for five years and then I decided to go self-employed as a mortgage advisor, and had just done my first year. That would work for a mortgage.
Lenders are generally happy if you stay in the same trade. A builder employed on an apprenticeship might get his training, become established, then go self-employed. If you’ve got that history, lenders will take you on the back of one year.
You can’t get a mortgage with anything less than a year. However in the construction industry where a contractor is part of the CIS Construction Industry Scheme, we can potentially get them a mortgage. As a rule, though, it’s a one year minimum.
The thing to remember is that everybody’s circumstances are different. A lot of people get disheartened. They go to their own bank and it can’t help – so they think they can’t get a mortgage. More than often not, a broker can find you something. We have lots of lenders available and knowledge about who fits which criteria. We can be worth our weight in gold!
How much can I borrow for a mortgage as a self-employed First Time Buyer?
It’s calculated based on the lender’s rules. Generally lenders will take an average of the past two years. If you’ve earned £30,000 one year and £40,000 the next, they add those two together to get £70,000 and divide it by two, which gives £35,000 as your income.
But if you’ve earned £40,000 the previous year and £30,000 this year, lenders will just use the lower of the two. It’s always good for your mortgage application to have your income going up when you’re self-employed. It shows that your business is healthy and you’re growing it each year.
You’re in charge of your own destiny, being self-employed. You haven’t got that backup of being employed, so it is a little bit more strict. Lenders want to make sure that you’ve got a good business, you know what you’re doing and earn a good income.
But whatever the situation, we can explain things. We will often pick up the phone to the underwriter to talk through the background to a client’s application. The underwriter can then take a view on it. Whereas, if you go to a bank, you’re just dealing with a mortgage adviser. You won’t get past them, and that’s the problem.
How is a mortgage calculated for a self-employed First Time Buyer in the UK?
It’s calculated based on your income. It’s usually about four and a half times your annual earnings minus any commitments, such as loans. Every lender has their own calculator and some are more generous than others. They also change these from time to time.
You might do a calculator with Halifax one week and a few weeks later it’s showing slightly less or slightly more. It’s all down to the rates and how much they want to lend. None of them want to be at the top of the tree with the best rate for too long, because they get so many applications in.
There are lenders that will offer as much as 5.5 times income, but it depends on your circumstances. That’s usually for people earning over a certain amount, and it’s exactly the same for people on PAYE as the self-employed.
One thing to note is that there can be a difference according to whether you’ve got a limited company or you’re a sole trader. As a company director, you can use dividends as well as your PAYE income. We do also have lenders that will use net profit – so if you don’t take all the profit out of your business a few lenders will use that as your income, even though you’ve not taken it.
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What documents do I need to apply for a self-employed First Time Buyer mortgage?
If you’re employed, you’d provide three months’ payslips, but for the self-employed we’d ask for two years self-employment income. Depending whether it’s a limited company or sole trader, we might ask for full accounts and tax calculations – your SA302.
If you’ve got an accountant, they’ll give you those when they do your accounts, or you can log on to HMRC and get them. They are a summary of your earnings. Alongside them is something called a tax year overview which summarises the tax you have paid.
You’ll also need bank statements and ID. We will complete a full fact find with you and if you’re ready to go ahead and look for a property, we will get you an Agreement in Principle. so you can go away and shop for houses.
Once you have found a house we’d potentially refresh the bank statements etc. And if we’ve gone into a new tax year, we’d need the latest calculations and overviews.
Can I get a mortgage as a self-employed First Time Buyer if I have bad credit?
We all worry about that, even if we pay our bills on time. If you do want to buy a house, don’t bury your head in the sand. Even with bad credit, a good broker is more likely to get you a solution, whether you’ve had a late payment, a CCJ or other issues in the background.
If you can’t quite borrow enough, we might know of another lender that can stretch your affordability a little bit, or find a different way around something. Don’t be scared. We don’t judge, and we see this all the time.
People give the biggest sighs of relief when I tell them their credit situation is not that bad. The worst thing for credit is anything absolutely brand new. If you missed payments last month and you’re looking for a mortgage, that will be a concern to a lender. They’re looking to lend you a lot of money. It’s going to be the biggest debt you’ll probably ever be in.
If you’ve missed a £500 credit card payment, they will ask questions. But as long as there is an explanation, we can often get around it. A one-off blip is fine.
Even If it’s something more serious and there’s been a history of it, there are ‘sub-prime’ lenders that accept clients with lower credit scores. You may need a slightly bigger deposit. You won’t get a 5% deposit mortgage if you’ve got quite low credit scores, but you’re probably looking at a 10% ior 15% deposit with these lenders.
If you’re in a situation where we can’t find you a mortgage right now, we’ll pull a plan together for you. If you’re not on the electoral roll we’ll explain why you should get on it. You might have a £1000 overdraft and be at £950 every single month. That’ll lower your credit score because you’re using 95% of what’s available to you. You’re not really paying it off.
Lenders want to see you have available credit and you’re not really using it, or you’re paying it off. That’ll give you a better credit score.
How can I improve my chances of getting a mortgage as a self-employed First Time Buyer?
Have a look at your bank statements. Make sure you’re running your account well. Have a look at your credit score and make sure it shows you manage your credit. Don’t use all your available drafts. Pay off your credit card.
First Time Buyers sometimes have low credit scores when they live at home with parents. I did a mortgage a couple years ago for an 18 year old and it was so hard because he didn’t really have any credit. I got it in the end, but sometimes that can work against you.
If you’re young, self-employed and want to start looking at buying a house in the next couple of years, get two years’ books behind you. If a credit card’s offered to you through your bank, take it. Make sure you pay it off in full every month – even if you only spend £10 on it. That will boost your credit score and the lender will see you can manage credit.
I did a First Time Buyer mortgage where a couple had both lived in other countries. They only had six months’ history in the UK. Certain lenders will allow us to put the foreign addresses in and track three years’ history. A lot of banks won’t like that, but we got them a mortgage first time with a high street lender.
How can a mortgage broker help someone who wants to apply for a mortgage as a self-employed First Time Buyer?
We can literally hold your hand throughout. Make an appointment with a broker – even if it’s a telephone call. I can get to know somebody in 10 minutes – how their business works, how they take their income, how long they’ve been trading.
We can quickly work out approximate borrowing. It is hard for the self-employed because you don’t know how much income your accountant’s going to put through until the end of the year.
We can give you some pointers – help you make a plan, whether it’s to buy a home in six months, a year or two years. So the sooner you make that call and explain your circumstances, the sooner you’re going to get to the next stage. Once we get your Agreement in Principle and you’ve been credit scored, you know what you can borrow and you can go out and find a house.
Gather your paperwork, be organised within your business and talk to a broker.
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Approved by The Openwork Partnership on 6/6/2024
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