Podcast approved by The Openwork Partnership on 29/01/2025

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

If you’re self-employed and looking at buying your first home, getting a mortgage is not as complicated as people believe. It’s not substantially harder to get a mortgage agreed if you’re a self-employed First Time Buyer.

As long as you’ve got proof of the income you’ve earned, it should be no more difficult than getting a standard mortgage on PAYE.

What’s the difference for a self-employed First Time Buyer compared with someone who’s employed?

If you’re employed, lenders usually want to see your last three months’ pay slips. The income proof you need to provide is much shorter term than for the self-employed.

If you’re a self-employed First Time Buyer applying for a mortgage, lenders look at the average of your last two years’ self-employed accounts. The reason is that businesses fluctuate – they want to see that your business is sustainable and the income will be steady in the long run.

Two years worth of self-employed accounts is the norm, but some lenders are happy to take the most recent year. One or two may want more proof with a third year. But generally, if you’ve got two years’ accounts that’s enough to show your income is sustainable.

Once you have that, it’s no more difficult to apply for a mortgage than it is for someone who’s employed.

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

For access to the vast majority of the market, you need two years’ proof of income. That means your last two years’ tax calculations and tax year overviews.

If you’re a limited company, we need your last two years’ company accounts to open up the vast majority of lenders.

Some lenders are more lenient, and just want to see the most recent year’s income. That’s your most recent tax calculations and tax year overviews, or again for a limited company, your most recent submitted accounts.

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

If you’re a First Time Buyer who is self-employed, again, it’s not dissimilar to someone who is employed. You can still have access to bad credit mortgages, for example. So, if you’ve had any missed payments, defaults, county court judgements (CCJs) or you’ve fallen behind on your bills, there are still specialist lenders that will lend to you as self-employed.

If you are looking at, for example, a five-year fixed rate or a two-year fixed rate, It’s identical, whether you’re self-employed or PAYE.

The only slight difference for a First Time Buyer is that some lenders may give you a slightly different income multiple. For example, most lenders will lend you between 4.5 times to five times your annual household income. If you are employed, a few lenders may go all the way up to six.

While you may not get access to some of these schemes if you’re self-employed, in general it’s much of a muchness whether you are employed or self-employed.

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

The minimum deposit is 5%. A 5% deposit opens up a huge chunk of the market as a First Time Buyer who is self-employed.

It always helps to have a bigger deposit, because for every extra 5% deposit you put down, the lender sees you as lower risk. They then give you slightly better interest rates – because the lower risk you are, the cheaper those rates.

So, although you can get mortgages with a 5% deposit, getting more together can save you money and potentially unlock products that might lend you more than with a 5% deposit. Speaking to a mortgage broker who has experience in dealing with self-employed people could make all the difference in how much you can borrow.

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

You might speak to your own bank direct and they could request an average of your last two years worth of accounts. They may only assess it on your tax calculations and tax year overviews – even if you’re a limited company.

But if you speak to somebody with access to the broader market, beyond just one bank’s particular products, they know that a limited company director can actually use net profits for the calculation of income, rather than just what you’ve drawn from the business.

If your business is earning a huge amount of profit but you’re not drawing all of that down, you can potentially borrow more. That’s why it’s great to speak to somebody who has that experience and can deal with lenders that can potentially lend you a higher amount.

I’ve not fully answered the question on how much you can borrow – because there’s so much variance, it massively depends on your situation.

How is a mortgage calculated for a self-employed First Time Buyer in the UK?

What this is really asking is how the income is calculated, but again, this varies depending on who you speak to.

If you’re a limited company director and a 100% shareholder, some lenders would use your share of the profits plus your director’s salary. For example, if your business generated £100,000 in profit after tax, as a 100% shareholder they would use that £100,000 plus the salary you paid yourself.

So if you paid yourself £12,000 for the year, they would take £112,000 as your income. Some lenders just take the income from that most recent year.

However, if you are speaking to a lender that takes an average of your last two years accounts, they would add two years’ net profits and two salaries together and divide that by two. They then use that as your income for the calculations.

If you are a sole trader, it’s slightly different. They would just look at the net profits for the most recent year or the last two years.

If you are a Construction Industry Scheme (CIS) contractor, even though you are self-employed, certain lenders will just look at the average of your last three months CIS slips. They take an average from those three to work out your income over a year. That usually means you can borrow slightly more than with your tax calculations.

What documents do I need to apply for a mortgage as a self employed First Time Buyer?

Some document requirements are identical for the employed and self-employed. For example, you’re going to need your last four months’ bank statements, a copy of your ID, proof of address and proof of deposit.

What changes from an employed to a self-employed person is that, rather than showing three months’ pay slips as proof of income, you need to show the last two years tax calculations and tax year overviews.

If you run a limited company, lenders also want to see the last two years’ accounts submitted for the company. You also need the last four months’ business bank statements.

So a lot of the documents are the same – there’s just a few differences around proving your income being self-employed.

There’s a massive misconception here to be careful about. People who run a limited company often believe that because they’re employed by their own company, they just need to provide pay slips. That’s not the case – we need proof of your full last two years accounts. Lenders just would not accept pay slips in this case.

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

It varies massively depending on which lender you’re looking at. But generally most lenders will look at your last two years tax calculations and tax year overviews.

For example, if you had earned £50,000, and then in the most recent year you earned £100,000, lenders would use the average of that as your income – which is £75,000 pounds.

If you really need to maximise your income, some lenders just look at your most recent accounts – which is helpful if business has jumped up massively. In the scenario I just mentioned, you’d be able to get £100,000 as income rather than the average of your last two years.

Again, if you’re a limited company director, they might look at the net profits from your share of the limited company plus the salary you pay yourself. They will either use the most recent year or the last two years, depending on the lender.

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

Preparation is key on this. Speak to your broker way in advance of looking at buying a property. There’s nothing worse than falling in love with a house and making an offer, only to find that you can’t actually afford it.

You haven’t spoken to a broker, and you haven’t earned enough money, or you find that something on your credit file is incorrect. Perhaps you could have ironed the issue out six months ago and had a higher chance of your offer being accepted.

Preparation is key – especially when you’re self-employed. Talk to a broker far in advance and we can get you mortgage-ready, so that in six or 12 months time you’re in a great position to start making offers on properties.

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

It’s just a case of preparing in advance and having a conversation with a broker who specialises in this. We speak to so many clients that have gone directly to a bank and end up disheartened.

Your bank might advise that you can only borrow a certain amount based on the last two years worth of accounts. You might run a limited company with a substantial profit, but that particular lender may not accept that and it massively reduces how much you can borrow.

Someone who knows more about the self-employed mortgage application can look at that straightaway. We can now unlock that profit as part of the affordability, which usually makes a huge difference in how much you can borrow.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Approved by The Openwork Partnership on 29/01/2025