Are contractors eligible for the First Homes scheme?

The First Homes scheme, designed to help local first-time buyers purchase new-build properties at a discounted rate (usually 30% to 50% below market value), is potentially open to contractors. While eligibility for the scheme itself hinges primarily on being a first-time buyer, having a local connection, and meeting income caps, the main challenge for contractors lies in securing the necessary mortgage financing due to their non-standard employment status.

Are Contractors Eligible for the First Homes Scheme? A Detailed Guide

The UK government’s First Homes scheme offers a significant opportunity for first-time buyers struggling to get onto the property ladder. Since contractors are generally defined as first-time buyers, they are, in principle, eligible to apply. The key consideration, however, is not the eligibility for the discount itself, but rather demonstrating financial stability robust enough to satisfy a mortgage lender.

For any applicant, regardless of employment status, the following general criteria for the First Homes scheme must be met:

• The buyer must be a genuine first-time buyer, defined as someone who has never owned a home in the UK or abroad.
• The property must be a new-build designated as a First Home by the developer.
• Applicants must meet certain maximum household income thresholds, which are set locally but typically do not exceed £80,000 (£90,000 in Greater London).
• Applicants must usually have a strong local connection, often meaning they work or currently live in the local authority area where the home is being sold.

Understanding the Mortgage Hurdle for Contractors

While a PAYE employee typically provides three months of payslips as proof of income, contractors operate under various financial structures (limited company, sole trader, or via an umbrella company). This requires lenders to use specialised underwriting methods, as contract length and continuity can present higher perceived risk.

Mortgage lenders, especially those participating in affordable housing schemes like First Homes, need strong assurance that the borrower can sustain their mortgage repayments over the full term. For contractors, proving stable income requires careful preparation.

Assessing Different Contractor Structures

The way your income is assessed heavily depends on your contracting setup:

1. Limited Company Directors

If you contract through your own limited company, lenders typically assess affordability based on one of two methods:

• Salary plus Dividends: Standard assessment, usually requiring two to three years of filed company accounts (SA302 forms and corresponding Tax Year Overviews). This method often requires proving consistent profit and dividend extraction, which can limit the borrowing capacity if profits are retained within the company.
• Company Net Profit/Turnover: Some specialist lenders will consider the company’s net profit or even gross turnover, rather than just the income drawn out. This approach can increase borrowing potential but requires specialist advice.

2. Day Rate Contractors

Many contractors work on short-term or fixed-term contracts and are paid a daily rate. Specialist lenders may use this day rate to calculate an annualised income, provided they can prove continuity of work.

The calculation usually involves:

Annual Income = Day Rate x 5 (days) x 46 (weeks worked per year).

Lenders typically require a minimum of 12 months’ contracting experience, and crucially, they want to see a current contract with a substantial remaining term (e.g., three to six months) or a strong history of contract renewals.

3. Umbrella Company Contractors

Contractors operating through an umbrella company are often viewed more like PAYE employees by some lenders, as their income is managed through the umbrella’s payroll system. While simpler, lenders will still scrutinise the underlying contract stability to ensure the pay continues.

Key Requirements for a Successful Application

To overcome the scepticism often faced by lenders when applying for a mortgage linked to the First Homes scheme, contractors must demonstrate meticulous financial organisation and stability.

Documentation Contractors Need

The documents required often go beyond standard mortgage checks and may include:

• Proof of Trading History: Minimum 12 months, ideally 24 months, of contracting history.
• Latest Contracts: Copies of the current contract and usually the preceding one, showing start and end dates and day rates.
• HMRC Documentation (SA302s and Tax Year Overviews): Essential for limited company directors and sole traders, proving declared income submitted to HMRC.
• Company Accounts: Certified accounts covering the required period (usually 1–3 years).
• CV/Professional Profile: Sometimes requested by specialist lenders to show depth of experience in the industry, making future contracts more likely.

Check Your Credit Report

Contractors, relying on specialist lending criteria, need their financial history to be impeccable. Any credit issues can significantly complicate manual underwriting processes.

Ensure your credit file accurately reflects your payment history and current liabilities before applying. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Navigating the First Homes Scheme Requirements

Since the First Homes scheme is administered locally by councils, the eligibility rules regarding income caps and local connections can vary slightly by area. Contractors must ensure they meet these specific local criteria alongside the general UK requirements.

For official guidance and details on how the scheme operates in your area, consult the GOV.UK First Homes scheme factsheet.

The Importance of the Deposit and Discount

The 30% to 50% discount offered by the First Homes scheme means the property is purchased at a significantly reduced value. This impacts the Loan-to-Value (LTV) ratio positively. Even though contractors might struggle to prove income stability, having a larger effective equity buffer (due to the discount) can reassure lenders, especially if the borrower also puts down a standard cash deposit.

Contractors will still need a minimum cash deposit, typically 5% of the discounted purchase price, but the total borrowing required is substantially lower than a standard market purchase.

Working with Mortgage Brokers

For contractors seeking to use the First Homes scheme, working with a mortgage broker who specialises in contractor mortgages is highly beneficial. Standard high-street lenders often rely on rigid, automated income assessments which may automatically reject non-standard income streams.

Specialist brokers are knowledgeable about lenders willing to use manual underwriting, which allows for a more detailed review of the contractor’s financial situation, including consideration of retained company profits or complex day rate structures. They know which lenders are ‘contractor-friendly’ and have criteria that align better with self-employed or fixed-term income.

It is important to remember that securing a mortgage is a rigorous process, and contractors should gather all necessary documentation well in advance of applying for a First Home property reservation.

People also asked

Can I use the First Homes scheme if I am a sole trader?

Yes, sole traders are generally eligible for the First Homes scheme, provided they meet the definition of a first-time buyer and adhere to local income and connection criteria. Mortgage affordability will be assessed based on the sole trader’s profits, usually requiring two to three years of filed accounts (SA302s) to demonstrate consistent and reliable income.

How long do I need to be contracting before I can apply for a mortgage?

Most mortgage lenders require a minimum of 12 months of continuous contracting history before they will consider an application. To access the broadest range of products, including those necessary for affordable housing schemes, having 24 months of trading history is highly advantageous as it proves long-term stability.

Are the income caps for First Homes applied before or after tax?

The income caps set by local authorities for the First Homes scheme are based on the combined gross annual household income (before tax). For contractors, this usually means the total income declared on tax returns (e.g., salary plus dividends, or trading profits) must fall under the local authority’s threshold.

Do I need a bigger deposit as a contractor using the First Homes scheme?

Contractors are typically required to provide the standard minimum deposit (usually 5% of the discounted price) like any other applicant. While the scheme itself does not demand a higher deposit from contractors, having a larger deposit may strengthen your mortgage application by reducing the LTV ratio, making you a more attractive borrower to the lender.

What if I have short gaps between contracts?

Short gaps (up to six weeks) between contracts are often acceptable to specialist lenders, provided they are factored into the calculation of annualised income (e.g., by using 46 or 48 working weeks instead of 52). However, frequent or very long gaps may lead lenders to view the income stream as unstable, requiring robust evidence of consistent employment history immediately prior to the application.

In summary, the First Homes scheme represents a viable pathway to home ownership for contractors. Success hinges not on scheme eligibility, which is generally assured if you meet the core first-time buyer criteria, but on mastering the mortgage application process by demonstrating clear, provable income stability and working with lenders who understand the nuances of contractor finances.