Can I Get a First-Time Buyer Mortgage Whilst Being Self-Employed?
If you’re self-employed and have had the dream of one day owning your own home, you’ve likely heard the myth that lenders shut the door to self-employed people who want to buy a house. It’s an understandable worry, particularly when so much online mortgage advice appears to be geared toward those with a simple salary.
The fact is, you can absolutely apply for a first-time buyer mortgage even when you are a self-employed applicant. It’s only a minor hassle of a few extra steps, compared to someone who is on PAYE. If you prepare, it is possible, however, to put yourself in a good position to be approved.
In this guide, we will explore what it means to be self-employed for mortgage applications, the deposit you may need, what documents lenders request, and how you can increase your chances of success.
Can You Get a First-Time Buyer Mortgage if Self-Employed?
Yes, creditors will lend to the self-employed, and that’s good news. There are mortgage products available whether you’re a sole trader, limited company director, freelancer or contractor. The most significant difference is that lenders need to be even more confident about your income, because it can appear less predictable than a monthly payslip.
For instance, income for a sole trader is based on annual profits, whereas a director of a limited company might pay themselves a lower salary but take dividends. Freelancers often juggle multiple clients at a time, and contractors may work under shorter-term contracts. Each of these arrangements is legitimate, but they involve more paperwork to document your income.
The key point? Being self-employed does not stop you from getting a mortgage, and the process is fundamentally no different to anyone else, but how lenders check your income is more stringent. Instead of a couple of payslips, you’ll likely require tax returns and accounts.
What Deposit Do You Need?
In theory, it may be possible for self-employed first-time buyers to secure a mortgage with a 5% deposit. In reality, however, most lenders are more comfortable with you being able to put down more like 10-15% or more. This extra padding helps mitigate to them that you’re less of a risk, especially if your income isn’t too consistent on an annual basis.
A larger deposit doesn’t just make you more appealing to lenders; it can also open up access to a lower mortgage rate. This would result in lower monthly repayments, which would save you money over the long term.
Let’s assume you have your eye on a £250,000 property. That would require £25,000 upfront with a 10 percent deposit. If you can stretch to 15 percent, that requires a total of £37,500 (an extra £12,500) and it might give you more choices of lender.
It takes time to save for a larger deposit, but it’s one of the best ways to offset the extra scrutiny self-employed applicants often encounter. If you have a larger deposit, lenders are less concerned about the occasional dip in your income.
How Lenders Assess Self-Employed Income
When it comes to assessing affordability, lenders like to see a steady and stable income. Unlike those in work, where a payslip can prove how much they are earning, self-employed incomes take a little more investigating.
Lenders typically want two to three years’ SA302s or tax calculations from HMRC if you are a sole trader. These show your declared profits.
If you’re a limited company director, lenders will assess both your salary and dividends. Some are even prepared to factor in retained profits that remain in the company, and that can be hugely beneficial if you don’t withdraw every last penny of it each year as income.
Contractors are sometimes assessed differently. Lenders may calculate this by taking your daily rate and multiplying it by the length of your current contract, provided you have evidence of a history of ongoing work.
Newly self-employed? While a lot of lenders would like two or more years of accounts, some will work off just a year, so long as everything else about your application is solid.
In all instances, lenders are trying to answer the same question: Can you be trusted to make the monthly mortgage payment? The best way to reassure them is to demonstrate either consistent or growing year-on-year income.
Documents Required
Having paperwork together early can help the process run more smoothly. Here’s a list of what lenders may request:
- 2–3 years of SA302s or tax returns
- Full accounts, ideally signed off by a qualified accountant
- Recent bank statements (business and personal)
- Proof of where your deposit is coming from
- Photo ID and proof of address
It’s also worth mentioning that each lender may have slightly different requirements. Others may only need one year’s accounts if the rest of your application is strong. Others might request three. Being prepared in advance can help to prevent delays and communicate that you’re ready.
Consider this step as creating a clear picture of your finances. The more precise and organised you are, the less complicated it is for a lender to say yes to you.
Challenges for Self-Employed First-Time Buyers
While it is certainly still possible to secure a mortgage, there are some hurdles that self-employed first-time buyers are likely to encounter more frequently than others.
One of the biggest is the inconsistent pay. Even if you make good money on average, fluctuations from month to month can make lenders nervous. Affordability checks are more stringent than in the past, especially since we have seen interest rates rise since the financial crisis; therefore, lenders need a bit more reassurance.
Then there are the two years of accounts needed. If you’re more recently self-employed, you’ll have fewer options, but not necessarily none.
Lenders also scrutinise your expenses more. If you have high business costs appearing on your accounts, this can lower the profits you declare, which reduces how much you can borrow.
In other words, those who are self-employed are placed under a greater level of scrutiny. But with some preparation and a little insight into what lenders are looking for, you can overcome the hurdles.
How to Improve Your Chances
The good news is that there are many steps you can take to make your application stronger.
First, if you can, save a larger deposit. An additional 5% can make a huge difference in how lenders view your case and what interest rates they offer you.
Two, keep your finances clean and separate. Commingling business and personal expenses can make your books messy and more difficult for lenders to figure out. Clear records will come to your advantage.
Third, file your taxes as soon as possible and make sure they’re correct. Any delays or mistakes in your HMRC filing can cause your application to be delayed or rejected.
Also consider shrinking outstanding debts. Lenders will take credit cards, loans or overdrafts into account when working out whether you can afford a mortgage, so paying these off makes your profile look better.
Finally, strengthen your credit history. Taking small actions, such as paying bills on time, joining the electoral roll and not applying too often for credit, can also help.
Some self-employed buyers also have an easier time working with a specialist mortgage broker. They also know which lenders have looser requirements for self-employed applicants and can help guide you toward them.
FAQs
Can I get a mortgage with only 1 year of self-employment?
Yes, one year of accounts is required by some lenders, but two or more gives you more choice.
Do lenders look at gross or net income?
They usually base it on net profit for sole traders or salary plus dividends for company directors.
Are rates higher for self-employed buyers?
Not necessarily. As long as you pass affordability checks and provide the proper paperwork, competitive rates may be available to you, just as they are to employed buyers.
Can contractors qualify as first-time buyers?
Absolutely. Some lenders are geared up for contractors and will use your daily rate to establish affordability.
Summary
So, is it possible to take out a first-time buyer mortgage if you are self-employed legally? Yes, you can. The submission isn’t as easy as for someone with a simple payslip, but with the proper preparation, it’s entirely possible.
Key things to focus on are your deposit, maintaining good evidence of your income and presenting yourself as the safest type of borrower. It may require a bit more work, but buying your first home as a self-employed individual is definitely a possibility.
If you’re self-employed and seeking focused guidance, Mortgaged can help you navigate the most-suitable mortgage options for your situation.
Your home/property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.
There may be a fee for mortgage advice. The precise amount will depend upon your circumstances and will be agreed with you before proceeding, but we estimate it will be £395