Obtaining a mortgage as a contractor can be a hassle. Learn about how this has changed and your options in this guide.
Getting a mortgage as a contractor has become easier. A mortgage is likely to be the biggest financial commitment that you will ever enter in to. The process can be long and daunting, but one thing it does not have to be is difficult, we can help with this. Before arranging your mortgage, there are many questions that you will want to answer. Of course, you can get a mortgage broker on board to do the work for you, but it will be up to you to make the decisions.
- How much can I realistically afford?
- What type of mortgage should I choose?
- How does the process work?
- What obstacles am I likely to come across as a contractor?
These are just some of the questions that you will want to answer.
We have created this simple guide to help you understand everything you need to know about obtaining a mortgage as a contractor. We hope that with this guide and advice from a broker, you will be in a confident position to make the right decisions for you.
Our guide explains the different schemes available.
What’s in the guide?
- Getting a mortgage as a contractor
- How much could you borrow?
- Overcoming the hurdles
Getting a mortgage as a contractor
When lenders assess a contractor for mortgage affordability without specialist underwriting procedures in place, they will want to verify income by seeing two to three years’ worth of accounts or tax returns. As many lenders have not kept up with changes in the labour market, their criteria will often fail to accommodate the growing ranks of contractors.
Umbrella company contractors will find that many of their expenses will not be considered when calculating income; if the lender understands the concept of an umbrella company at all. Limited company contractors will experience a similar problem, as any money retained in the company, for tax purposes, will also not be considered. Both methods of operating are likely to lead to a shortfall in borrowing.
Generally, banks and building societies only lend to those who are considered a low risk, and contractors are regarded as high risk. The reason being is that lenders worry that these individuals will struggle to afford their monthly payments when their current contract comes to an end.
How much could you borrow?
In the past, most lenders worked out what they would lend you by typically multiplying your sole or joint income by a fixed number. This is now not the case.
Currently, most lenders look at a full financial picture, including:
- Your monthly pay
- Income from investments
- Income from pensions
- Income from child maintenance or grants
They will also look at your available credit, how much your disposable income amount each month and other bills/debts etc.
This information will allow a lender to develop a good understanding of how much you will realistically be able to pay back each month, thereby helping them to calculate how much they will be willing to let you borrow. Make sure your spending habits are allowing you to live well within your means, and if you’re able to pay off any unsecured loans and credit cards then do so, as they can impact your borrowing potential.
Using an online mortgage calculator can be a great tool with your initial mortgage planning. with an estimation of how much you could borrow, you can start to plan your deposit amount and also understand if you need to continue saving, understand your monthly repayment amount, ensure you have enough aside to cover any fees and potential property can become much simpler.
Overcoming the hurdles
A specialist mortgage broker can help with the process as they will have a thorough understanding of contractors and contractor friendly mortgage lenders. These brokers have designed bespoke contractor-based underwriting with many lenders, which means contractors are able to avoid the traditional frustrations.
This unique underwriting ensures that your income will be assessed using a multiple of your gross annualised contract rate, using this figure to calculate how much you can borrow based on your true earnings.
Essentially this means you will be able to secure a larger mortgage than if traditional underwriting was used as you are no longer penalised for using a tax efficient method of earning. The mortgage broker will be able to present your circumstances upfront to the most suitable contractor- friendly lender.
There are two essential pieces of documentation initially needed by a specialist brokers to prove longevity and affordability to the lenders:
- A copy of your current contract
- An up to date copy of your CV
These items will allow specialist brokers to approach lenders even with an absence of traditionally requested self-employed documents such as trading accounts.
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