Getting a mortgage isn’t always easy, especially when you’re a contractor, given that lenders find it challenging to understand the way you work and get paid and often prefer to invest in ‘lower risk’ individuals. However, obtaining a mortgage when you’re self-employed isn’t an impossible task. On the contrary, plenty of contractors get mortgages and own their own home, so you shouldn’t let this hold you back from pursuing the career you always wanted to have.
As contractor accountants, we understand you may have many questions about this – as well as misconceptions – so we aim to answer them and help you figure out how to get a mortgage when you’re not a permanent employee.
What Factors Can Get You Turned Down?
Contractors are a unique case when it comes to finances, so it doesn’t come as a surprise that many lenders, especially those in the high street, don’t completely understand your earnings and how much you can actually afford. There are several complications or issues that may get your mortgage application turned down, including poor credit history, career gaps and undisclosed credit.
Not being registered to vote can also have an impact on your application, as will having too much debt or too many credit applications. Of course, if it’s clear that you can’t afford the mortgage repayments, it’s likely your application will be declined – to prevent this, it’s important to consult a financial advisor ahead of time.
If you’ve changed your trading style recently, you may also find it more difficult to get a mortgage. Often, sole traders will change to a limited company as they start making more money, in order to separate personal finances from business ones. However, this change can make it more difficult to get a mortgage, as some lenders may consider it a new business that requires a minimum of one year of trading before even considering your application.
Misconceptions About Getting a Mortgage as a Contractor
Many contractors believe they are unable to get a mortgage. Others think it will be an extremely difficult task. Getting a mortgage when you’re self-employed can, sometimes, be challenging, but contractors are more than able to get them. Some of the biggest misconceptions about this issue include:
You Need a Deposit of 50% – Contrary to what many people think, you don’t actually need to put down a massive deposit of 50% when applying for a mortgage. After all, lenders will not deny your application just because you didn’t come up with half the value of the property.
First-Time Contractors Don’t Qualify for Mortgages – On the contrary; while a track record is often expected by lenders, some will not hesitate to offer competitive deals for first-time contractors. This will make it easier for you to get on the property ladder.
Limited Company Contractors Have it Easier – As the owner of your own limited company, your employment status is different from that of a sole trader or employee of an umbrella company. For this reason, lenders and banks will look at your mortgage application in a different light, which isn’t always positive. For example, many lenders tend to look at your salary and dividends as your income, instead of considering your total earnings (including the company’s profit). Getting a specialist lender may be the best option.
Contractors Always Need Three Years of Accounts – Many individuals believe they need to show three years of accounts before being able to apply for a mortgage. However, this is not the case now. Brokers can help you if you’re not completely new to the contracting world – your CV and skillset, as well as your day rate, can help convince lenders of your earning potential. Working with a contractor-friendly lender is crucial for this.
Contractors Will Pay More Interest – You won’t be charged extortionate rates of interest if you’re a contractor looking to purchase a house. In fact, you’ll be charged the same as permanent employees.
You’re Considered High Risk – While some lenders may look at contractors in such a way, not all will consider you ‘high risk’. Everyone, even those in permanent employment, can be thought of as high risk. If you have the necessary deposit available and a good credit rating, there is no reason for lenders to reject your application.
Contractor Mortgage Applications Take Longer to be Processes – As long as you have all documentation in order, it shouldn’t take longer for your application to be approved when compared to other types of workers. It may take some time to put it all together, including your payslips but, when it comes to the mortgage application process, you stand in equal footing to permanent employees, although slow lenders will probably take longer to approve it.
How To Improve Your Chances of Getting a Mortgage
There are several things you can do to increase your chances of getting a mortgage, as well as a good deal. The tips below offer a guide for those wanting to learn more about how they can finally become homeowners even when working as a contractor:
Get a Financial Advisor – While you don’t need a financial advisor to get a mortgage, the process will probably go faster and save you from potential issues if you request professional help. Many advisors already have relationships with lenders who are happy to approve contractor mortgage applications as well.
Offer a Larger Deposit – You don’t really need to do this but, just like with any other type of worker, having a large deposit means you are considered less of a risk for mortgage lenders (a 10% to 25% deposit is, usually, the recommended range). This makes you more likely to get a better deal since you’d be borrowing a smaller amount. After all, the less risk a bank or lender takes, the more favourably your application will be considered. However, if you are unable to do so or prefer to put down a smaller number, you won’t be turned away and will still be considered for a mortgage.
Reduce Unemployment Gaps – One of the best perks of being a contractor is that you are your own boss, get to make your own hours and can take a break or holiday at any given moment. However, try to minimise this downtime in the lead-up to purchasing a house – many lenders may not like the fact that you’ve been out of work for two months out of a year, for example. In addition, you should also showcase any ongoing contracts with clients and try to put in place agreements that are likely to be renewed.
Have a Good Credit Score – No way around it; having good credit is one of the main factors in getting your mortgage application approved. Lenders will always be on the lookout for proof of good financial management, but this is especially important if you’re a contractor and your wages are not consistent. Several things can negatively affect your credit rating, including missing payments or being late to pay bills or credit cards, and credit cards that have been maxed out and have large overdrafts.
Choose the Right Lender – Some companies will be better suited for you and are more likely to approve your application than others. If you’re unsure about how to find the right lender, contact a broker who will do it for you.
Avoid Payday Loans – Payday loans don’t have a good reputation; they’re often associated with people going through financial difficulties, so you may want to stay away from them unless absolutely necessary. Most lenders will turn down your application if you have a recent record of these types of loans.
Prevent Multiple Credit Checks – Be it for credit applications or insurance, for example, you’ll want to avoid having several credit checks in a short period of time, since this will bring down your credit score.
Ensure Paperwork is in Order – Making sure all contract paperwork is up-to-date and in order is crucial. While most contractors won’t have several years of company accounts to show during the application process, a specialist broker may be able to help you get a mortgage with your current documentation. For this reason, you’ll want to have your contracts ready to submit with all the relevant details, from your client names to your rates.
Know Which Kind of Mortgage You Want – There are several types of mortgage to choose from, including capped rate, variable rate and fixed rate. It can be challenging to find the right one for you, so it’s important to research and ask a specialist adviser if you’re not sure.
It’s entirely possible for contractors to get mortgages (and a good deal too), although there are factors that will affect your eligibility. Being aware of them will make it easier for your application to be accepted. We’ve been helping contractors handle their business’ finances for many years and are always on hand for any questions you may have. You can also benefit from our contractor tax calculator, which will help you calculate your take-home pay.
