Working as a contractor provides a great deal of flexibility and independence to those who take the leap. However, despite all of the benefits, getting a mortgage can be a little trickier than it might be for those employed by a company. But don’t despair! Even if you’re a contractor early in your career, it’s not impossible to get a mortgage, but it might take a little more work.
At The Mortgage Heroes, we understand that trying to find the right mortgage is a daunting task. That’s why our experts have gathered together all our top tips for getting a mortgage as a contractor into this handy guide!
What Do Contactors Need to Get a Mortgage?
As with anyone looking to get a mortgage, contractors need to provide proof of income. The general belief is that contractors and freelancers require 2-3 years of accounts before they’ll even be considered, but this simply isn’t the case. Many contractors who have been contracting for a short period have still found mortgages, you just need to find the right lender.
Some lenders will be happy even if it’s your first contract if you’ve got proof of employment in the same field before you transitioned to contract work.
There are several things that a contractor might need to provide when looking to apply for a mortgage. These can vary depending on a variety of factors, but include:
Identification (usually a passport or driver’s licence).
A copy of your current contract (previous contracts can be included in this as further evidence).
A copy of your CV – this is required to demonstrate your working experience, track record and ability to maintain contract work.
Bank statements from the last six months.
Copies of your limited company’s accounts – these should be signed off by an accountant.
A copy of previous P60 forms can be used for new contractors.
Copies of your SA302 (tax calculations from HMRC).
Get Your Accounts in Order
Before you consider applying for a mortgage, make sure that all of your accounts are in order. Ensure that there’s no outstanding payments looming over you and nothing errant is negatively impacting your credit score. It’s a great idea to use an accountant to keep track of everything and sign off on your accounts. Many lenders won’t even consider an application unless it’s been signed off by a certified accountant.
Make sure that you know what your average yearly income is. Lenders will usually calculate this by taking your day rate, multiplying it by the number of days you work a week, then multiplying that by 48 weeks. Others might take your director’s salary plus your company’s drawn dividends into account. Either way, you’ll need to be able to show that your accounts are consistent and reliable.
If you’ve been contracting for a long time, lenders will likely take your earnings for the last few years and average them out. If your earnings spike up and down year-to-year, then a lender might instead choose to take the lowest as an indication of your earning capacity. This will result in you being able to borrow a smaller sum than you might be able to actually afford.
Improve Your Credit Score
Having a good credit score is especially important for contractors. It’s a proof of strong financial management skills. If your income isn’t guaranteed, then being able to show your great credit score can reassure a lender that you can be relied upon to pay off debts.
A few of our top tips to improve your credit score include:
Spending small amounts on a credit card, then paying it off in full each month will not only improve your credit score, but also show lenders that you only have to use a small percentage of your available credit.
Don’t miss your repayments – a mortgage is similar to a credit card, missing repayments on your credit card might mean that you’ll miss mortgage payments, too.
Close any unused accounts as they pose a fraud risk.
Check financial links – if you’ve ever shared a joint account with someone, your credit scores might be linked, even if they no longer share the account with you.
Register to vote – this is seen as a sign of stability, and makes it easier to confirm your identity.
Create a Consistent Working Pattern
As a contractor, it’s important for you to establish repeat business. Small gaps in your work are expected, as everyone takes time off, but larger gaps in work will need to be justified. Some lenders will want to know what your plans are following your current contract, especially if you work on shorter timespans.
Even if you can afford something much larger, once you own a property, your chances of securing your next mortgage are considerably improved. Consider a cheaper property that requires a smaller loan. One of the main benefits of contract work is that you are likely to have more money saved up for a deposit. On a smaller property, you’ll be able to put forward a significant deposit. This reduces the amount that you’re asking to borrow, and makes lending to you less risky.
Find the Right Contractor Mortgage with The Mortgage Heroes
There’s a lot of hoops to jump through when applying for a mortgage. At The Mortgage Heroes, we pride ourselves on our people-focused approach to securing the right mortgage, no matter your situation.
We specialise in mortgages of all shapes and sizes. If you’re a contractor looking for advice, contact us to have a chat with one of The Mortgage Heroes. We’re here to support you on every step of your mortgage journey.
We can help you find a mortgage. Contact a mortgage hero today.