Contractor Mortgages Explained: Getting a Mortgage as a Contractor
Getting a mortgage as a contractor may require you to jump through a few more hoops than if you’re employed, but don’t let this put you off. Contractor mortgages might be available if you have a certain level of stable earnings and proof that your services are in demand.
Working as a contractor or freelancer can provide many benefits, but can also make life a little harder if you want to secure a mortgage to buy a home.
The main difficulty lies in the perception that your income may be less certain than if you were an employee, something which can leave lenders more reluctant to approve mortgages for contractors. However, that doesn’t mean your home ownership dreams won’t ever be fulfilled, just that there’s usually a few more barriers to overcome.
Here’s what to expect if you’re a contractor applying for a mortgage.
How to get a contractor mortgage
Preparation is key when getting a mortgage as a contractor, particularly when it comes to proving that your finances are in good enough shape to allow you to take on a mortgage.
To give yourself the best chance of securing a contractor mortgage you’ll generally need to:
- Demonstrate your level of earnings
- Prove the reliability of your income
- Provide all the documents and evidence required
- Put forward a suitable deposit
- Have a decent credit score (there may be still be options if you haven’t)
- Potentially look beyond mainstream lenders to specialist mortgage providers.
What mortgage criteria is used for contractors?
The typical criteria that would be taken into account for any mortgage application – such as your credit score, property type and age – are also key considerations if you’re applying for a contractor mortgage.
Your income, of course, is absolutely crucial too, but given the nature of contractor work, the following will also likely be important considerations to a lender if you’re a contractor applying for a mortgage:
- The length of time you’ve been a contractor
- How long you’ve worked in a sector overall
- The length of time remaining on your current contract
- Your track record for having contracts renewed
- The basis on which you work as a contractor (employed on short/fixed-term contracts, or self-employed).
Proving your income as a contractor
How your income is assessed to work out whether a mortgage is affordable for you can differ between lenders. Some may take an average of what you have earned over a certain number of months or years, while others may base their decision on your earnings for the last year, or the lowest annual figure you’ve posted in recent years.
The day rate you’re paid might also be used as a means to work out your potential earnings over a year. You’ll usually need to supply proof of how many days you typically work a week, and the number of weeks you work in a year, factoring in holidays and potential time between contracts as well. This method may be preferable if you’ve just started out contracting but have plenty of work formally lined up for the future.
While some lenders will be satisfied with seeing proof of the income you have earned over the last six months, others will want evidence stretching back as far as three years. This can pose a problem if you want to get a mortgage but have only been contracting for a short period of time – here you’d almost certainly need the help of a mortgage broker to find a way to proceed.
What if I’m set up to contract as a limited company?
If you operate as a limited company, lenders will generally determine your mortgage affordability by looking only at your salary and any dividends you receive. If you pay yourself only a small wage, it could impact your ability to get a larger mortgage.
If this poses a problem, approaching a broker or lender that specialises in contractor mortgages – and may consider your other earnings and accounts as a whole – could be a sensible option.
What if I’m buying with someone else?
If you plan to buy a home with someone who works in full-time employment it could make it easier for you to get a mortgage as a contractor.
Firstly, when you apply for a joint mortgage, both of your incomes will be considered by your lender. And secondly, lenders may view an application that can also display a reliable income more favourably – putting the name of whoever is employed first on the application may help reinforce this.
If your parents or other family members want to help you buy a home, another potential option could be to take out a guarantor mortgage. Here, your guarantor promises to make good on your mortgage payments if you don’t. This could help to allay the concerns a lender might have over the reliability of your income as a contractor.
» MORE: Learn about guarantors
What documents will I need to provide?
You should expect to provide more supporting paperwork as a contractor getting a mortgage than if you were employed. Your lender or adviser will let you know exactly what is required, but often this will include:
- Proof of your identity and address
- Recent bank statements
- Copies of contract agreements
- A copy of your CV
- Signed accounts
- SA302 tax calculations
- Proof of expenses
Proof of your identity and address (typically in the form of a passport, driver’s licence and utility bills) and sight of your bank statements are staples of any mortgage application. However, with a contractor mortgage, lenders will usually also want to see invoices, copies of past and future contract agreements and your CV as evidence of your annual income and the day rate you’re paid.
If you’re providing accounts as proof of income, they’ll need to be signed. Alternatively, it may be acceptable to supply copies of your SA302 tax calculations from HMRC.
Be prepared to be questioned about, and provide proof of, any expenses that you incur as a contractor too.
What deposit do I need for a contractor mortgage?
There is no set size of the deposit you need to get a mortgage as a contractor, but a 10% deposit will usually be considered a good starting point.
If you can put down more, it may improve your chances of approval as a lender will be taking on less risk by offering you a smaller loan. The higher your deposit, the lower the interest rates you might be offered too.
» MORE: What is a good mortgage deposit?
Can I get a contractor mortgage with defaults or bad credit?
Yes, you can, but you might need to approach a specialist mortgage lender to do so.
If you miss bill payments or have poor credit, it’s likely you’ll find it more difficult to secure a mortgage, but it may not be impossible. To give yourself a fighting chance of success, you should improve your credit as best as you can and make sure all other aspects of your application are as polished as possible.
If you’re getting rejected or being offered unreasonable terms, a mortgage broker will often be able to direct you towards lenders with experience in dealing with contractors, and/or people with bad credit.
» COMPARE: Bad credit mortgages
Where can you get a mortgage if you are a contractor?
Contractor mortgages are available through mainstream lenders and specialist mortgage lenders and advisers.
A high street lender may be a viable option if you’ve been a contractor or freelancer for a good number of years and can demonstrate that you have a dependable and regular income.
However, with most mainstream lenders using automated assessments set up to provide quick mortgage decisions on permanent full-time workers, contractors shouldn’t be surprised if their mortgage offer is for a lower amount than they want, or they are turned away.
For this reason, contractors can turn to lenders that are more open to providing mortgages for contractors. Here, your application will be considered in the context of you being a contractor and with an appreciation of the nuances that this can bring in relation to your income, an experienced independent mortgage advisor should be able to direct your application to these lenders.
While you can often approach these lenders yourself, it may prove beneficial to talk to a mortgage broker who can point you in the right direction and offer support if you want to apply.
» MORE: Do you need mortgage advice?
6 mortgage tips for contractors to consider
Although getting a mortgage as a contractor may be less straightforward than if you were permanently employed, you could improve your chance of approval success if you:
- Provide as much proof as you can of your income from contracting (and expenses) by gathering relevant invoices, bank statements and accounts.
- Demonstrate you’ve had a reliable and consistent work stream for a good length of time
- Secure future agreements for your services, to show security in your earnings going forward.
- Make sure your credit score is as good as it can be.
- Save as big a deposit as possible.
- Find a mortgage broker that can demonstrate they have experience in finding lenders for those who work on a contractor basis. Their market knowledge will help you place your application with the best lender for your circumstances.
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Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more