Finding a mortgage as a contractor can sometimes be complex. Luckily, with expert financial advice and guidance, your property purchasing dreams can come true.
Contractors and self-employed individuals come in all shapes and sizes. One thing they have in common, across the board, is that they work differently from the traditionally employed. They’re more often responsible for managing their own time, workload and finances.
Though this can feel like a curse when it adds effort and responsibility to your busy day-to-day working life, it’s a blessing in terms of helping you to build crucial skills such as resilience, attention to detail, focus and perseverance. All of which will come in handy when you’re ready to step onto the property ladder and make your first mortgage application.
Keep reading, and we’ll go over all the essential details you’ll need to know as you attempt to secure a mortgage as a self-employed contractor. It’s not as impossible as you think.
The mortgage essentials, in brief
When you apply for a mortgage of any kind, the amount of money that a lender can (or will) reasonably approve is dictated by things like:
· Your credit
· Your income
· Your debts
· Your recent credit/loan applications
These criteria apply whether you’re in traditional employment or working for yourself and building your own business. If, for example, you have a high DTI (debt-to-income ratio), you’ll struggle regardless of where your income is derived from. Conversely, an excellent credit score will always work in your favour.
However, when you’re working for yourself without a guaranteed monthly income, you’ll find that your earnings are more prone to fluctuation than the average employee’s. And you might find that mortgage providers (and even some brokers) might be less willing to lend to you.
Key differences for contractors
Lenders regularly approve contractor mortgages, but that’s not to say they can’t be complicated and confusing to navigate. Here are the five key differences between getting a mortgage as a salaried employee and getting a contractor mortgage as an independent professional:
1. How your income is assessed – income is harder to predict among contractors and the self-employed, so lenders must take extra care to evaluate effectively. They’ll look at how long you’ve been doing what you do, how many contracts you’ve had renewed and how long’s left on your current contracts. They’ll average out your income and even account for your particular industry.
2. How much you can borrow – here are the sums often used by lenders to determine how much they can offer contractors: Day rate x number of days worked each week = weekly income. Weekly income x 46 or 48 weeks = annual income. Annual income x 3, 4 or 5 (differs between providers) = maximum mortgage amount.
3. The size of your deposit – Certain lenders will cap their loan-to-value limit differently for contractors. This means that while they might give a 90% mortgage to a traditionally employed person with a 10% deposit, you might only be approved for an 80% mortgage with a 20% deposit. Save as much as you can before you apply.
4. The time it takes – the best thing you can have in your arsenal when applying for a contractor mortgage is a strong track record. Unfortunately, if you’re just starting out and can’t yet prove that your income is stable, you might have to wait a while – usually a minimum of two or three years. (Especially if your credit score is average or below average.)
5. The lenders you’ll be suited to and how you’ll approach them – Not every lender will be interested in assisting you or approving you, especially if you go straight to them. Consider looking into the support of a mortgage broker who specialises in helping self-employed people and contractors onto the property ladder.
One last note: If you have a contract with an umbrella company, mortgage approval can be slightly more complicated. But, if you approach the right lender after working with a company for over a year (with a good working history of renewed contracts), you should be absolutely fine.
Effective financial management is an essential part of the journey to home ownership. Whenever you need accountancy services or umbrella employment support, our partner CMME are just a call (or an email inquiry) away.