12th March 2018
There are quite a few differences when you are applying for a mortgage as a Contractor compared to when you were working in a permanent role. It doesn’t mean that securing a mortgage needs to be stressful, but it does pay to do your homework to make the process as pain-free as possible.
It’s important to know the proof of earnings that you’ll need to submit. These can be different if you are running your own limited company or if you are working under an umbrella company. Whatever the paperwork required, it’ll need to be up-to-date. If you are considering getting a mortgage arranged soon, whether it is a new mortgage or remortgage, you’ll need your record of earnings up-to-date. So if your financial year has just passed, or you are due to submit your self-assessment, get it done as soon as possible. If you haven’t it will hold up your mortgage application.
This applies to anyone applying for a mortgage, not just Contractors. However, as there is often a bit more paperwork required when applying for a mortgage as a Contractor, you’ll want to plan ahead. With the right paperwork in place, we’ll typically get the initial borrowing confirmation from a lender within 48 hours for you. Getting the final offer in place, with all paperwork approved, can take between 2 and 8 weeks, depending on the lender. This means that planning ahead and getting your affairs together is always the best option when applying for a mortgage as a Contractor.
Is your current credit rating good? This shows that you are creditworthy and reliable in terms of sticking to your repayment terms. If you have problems with your credit rating you can still often arrange a mortgage, but there will be more hoops to jump through, so you will need a broker like us who knows what they are doing.
When you are considering applying for a mortgage it is a good idea to reduce any additional borrowing on credit cards and loans to a minimum. Mortgage lenders will look at your total borrowing commitments as well as other outgoings when calculating how much they can lend you. Reducing these down before making your mortgage application can be a good strategy.
With mortgage deposits, bigger is better. Typically a bigger deposit will get you better deals and lower overall borrowing. As a rule-of-thumb you should be aiming for a deposit of 10% with a mortgage, or higher if possible. It is possible to get a mortgage with a lower deposit, but when you are contracting you will often have surplus income- putting it to one side for your mortgage deposit is a great use for it. This is why thinking ahead when it comes to mortgages is time well spent. With current low interest rates on savings, it makes sense to put surplus money you have either into a larger deposit on your mortgage or paying down the mortgage faster when you have it in place.
If you have been contracting for a couple of years and have had multiple contracts or contract extensions, these will all make your mortgage application process easier. If you have been contracting for less than a year, you’ll need to make sure that you have a strong and up-to-date CV, as well as a copy of your contract to make your case. When you are contracting and planning on taking on a mortgage, avoiding periods when you are out of contract is also strongly recommended. Longer or regular breaks in contracts can send warning signals to lenders.
You may have additional earnings in place from rental properties and other businesses. These earnings can all be taken into consideration when applying for a mortgage. Getting the information of these earnings together in advance will make the process much faster.
The other side to this is your outgoings. Mortgage lenders will lend against affordability criteria, so you’ll need to provide details of your regular outgoings. It is best to make a list of these in advance. If you are looking to maximise your borrowing it can help if you take opportunities to reduce your committed outgoings as part of this process.
The problem with high street lenders is that they will run surface credit checks and give you an initial approval. Then, when it comes to actually putting the mortgage in place, things will often fall over with the fine details of proving your income. Especially for company directors paying themselves the minimum salary and taking the rest on dividends. Not only can this be a massive frustration, it can also mean failed credit checks, that can raise issues for other lenders looking at your mortgage application.
When applying for a mortgage as a Contractor, lenders will have different requirements to when you were in full-time employment. This can be quite a challenge, especially if it is the first time that you have been through the process. Working with a specialist broker like us will save you time and stress. We know exactly what the lenders are looking for and the paperwork that you need to have in place, so you can avoid the issue of failed credit checks and lenders making offers that they subsequently don’t see through.
All content is accurate at the time of publication